These are the pros and cons of 1031 exchanges as a real estate investor.
Today I’m sharing the pros and cons of a 1031 exchange for those of you who own a rental property or are considering buying one.
Let’s say you buy a rental property for $200,000, and in a few years, it’s worth $300,000. You’re ready to sell it and want to keep that extra $100,000, but you’ll have to pay income taxes on the money it earned over time. However, with a 1031 exchange, you’ll buy a similar property to the one you’re selling with the money you earned from the sale. (Though, the property can be a little smaller or larger than the first one.) When you move those funds with a 1031 exchange, you avoid paying taxes on them.
I’m currently doing a 1031 exchange where I’m selling one property and putting the proceeds into two different properties. That allows me to get a very low interest rate on the two new properties because I’ve split the proceeds from the first property and have $125,000 to use as each new one’s down payment. I’ll have a 3.5% interest rate over 10 to 20 years, which means my money is working hard for me twice. Of course, I’ll also avoid taxes because I rolled those dollars into like-properties.
However, there is a negative side to 1031 exchanges. Eventually, you’ll have to pay taxes on the income you’re making from these properties unless you keep making 1031 exchanges. If that’s the case, it’ll likely be a family member down the line that will benefit from the money you’re making from your investments, not you. Of course, you can always pay the large amount of money you’ll owe for taxes and keep whatever’s left.
Keep in mind that if you decide to do a 1031 exchange, you only have 45 days from the moment you sell one property to identify the next one you’re purchasing. Then once you close on the first property, you have six months to close on the second one. Remember that investing in real estate is always a good idea, whether you’re doing it short or long term.
If you have questions about 1031 exchanges or any other real estate matter, call or email us. We would love to speak with you. We’re also never too busy to help someone you refer to us.