Pokémon are suddenly taking over the world. Why the staggering hype with Pokémon? Pokémon Go is a new mobile game that blends real and digital worlds together using your phone’s location services and camera so that you can catch virtual Pokémon in real life. The game is simple yet deceptively complex. There’s strategy involved, similar to using a 1031 Exchange to defer your taxes. And with 1031, like Pokémon Go, you want to catch them all — opportunities that is.
Opportunities are key with your investments. Just like how CFOs and financial planners reassess stock portfolios, real estate investment portfolios should also be reviewed periodically. Why? Because as the real estate market changes, new opportunities become available and financial objectives shift. Depending on your personal circumstances or the circumstances of your business, it may be a good time to reposition a portfolio utilizing a 1031 Exchange. Consider the following points to help determine if a 1031 Exchange makes sense for you/your client:
- Tax Deferral
Due to an increase in demand, there is a good chance your property has appreciated. Your property may be at or close to maximum appreciation. A 1031 Exchange may be a great opportunity to defer your capital gains taxes and use the equity to purchase property with more appreciation potential.
Every year that commercial/investment property is owned, you are eligible for depreciation deductions on your tax return until your property is fully depreciated. The recapture tax that is typically due when the property is sold is deferred by structuring the transaction as a 1031 Exchange.
Your apartment building, single family rental or other investment property may not be yielding you the largest return. A 1031 could increase cash flow opportunity by exchanging into a different investment property or a more passive income growth DST.
Many people think that once they sell a property, they must remain in the same type of property to satisfy the IRS’s requirement of like-kind. Not true. A taxpayer can purchase any type of real property for replacement property. In other words, a taxpayer can sell a single family rental home and purchase an apartment building or sell farm land and purchase a condo. A 1031 gives you opportunity to maximize diversification.
Stimulating new and leveraging more investment with 1031 tax deferral is a powerful tool used to preserve equity and strategically build wealth for inheritance.
In summary, through a 1031 Exchange, an investor can sell investment property and accomplish a number of tax and investment goals. A 1031 Tax Deferred Exchange permits the investor to defer federal capital gains tax, depreciation recapture tax, investment income tax imposed by the Affordable Health Care Act and state tax. The investor can buy property with improved cash-flow, and if encumbered, it will provide an interest deduction. If the replacement property is greater in value than the relinquished property, then depreciation deductions will also be available for the increased basis. Additionally, because multiple properties can be acquired through a single exchange, the investor can diversify the real estate portfolio, thereby hedging the investment risk inherent in a single property, or alternatively sell multiple properties to combine into one replacement property.
In our world today, virtual Pokémon are invading. For 1031, keep your game real and maximize your investment opportunities by capturing the strength of 1031 benefits. Take the time to review your investment real estate portfolio. If repositioning a real estate portfolio is for you, the valuable opportunities of a 1031 Exchange should definitely be considered. Be strategic and go catch ‘em all!
Investment Property Exchange Services, Inc. (IPX1031®) is a Qualified Intermediary providing a full range of tax deferred exchange services across the country including forward, reverse and build-to-suit transactions. 1031 Exchanges are all we do here at IPX1031®, so we know all the ins and outs of the safe harbor regulations. We pride ourselves on not only being the industry leader in service and security, but also strive to be your valued information resource. As the nation’s largest 1031 Intermediary, IPX1031® has offices throughout the country and a highly skilled team of exchange attorneys, CPAs, coordinators and sales executives to provide quick answers and guidance. We look forward to helping you and/or your clients maximize qualifying investments through a 1031 Exchange strategy.