5 Reasons to Take Advantage of the 1031 Exchange Program

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(Newswire.net — June 8, 2017) — Whether you’re paying into an investment property that isn’t performing as you’d expected or you just want something new, upgrading and switching to a different property is certainly still an option. Unfortunately, there are plenty of things that make such a move very difficult to achieve without the right guidance and procedures. There are so many factors to consider, ranging from taxes to the technicalities involved in closing the sale, so you’ll want to be sure that you’ve done your due diligence beforehand and are prepared for all of the steps involved. One of the best ways to take care of the tax situation is to arrange the sale and purchase of the house as a 1031 exchange. Here are five important reasons to consider that option:

1. You Won’t Have to Pay Capital Gain Taxes on the Sale

One reason many people hesitate to sell their old investment property and buy a new one is because they don’t want to be stuck paying the taxes and fees associated with the sale and then losing that money out of their equity. The 1031 exchange program helps you get rid of that caveat by making it so you can switch to a different property of equal value without being burdened with exuberant taxes might otherwise make it an unpractical move. Plus, you don’t have to settle for something that is below par because 1031 exchange properties can be almost anywhere as long as they meet the requirements for qualification based on the value of your previous property and mortgage loan.

2. There are Several Options

There are also multiple ways you conduct a 1031 exchange. It’s important to do your research to determine which would be best for you, but essentially you have the option of selling your old investment property and then finding another property within a certain amount of time (delayed exchange), buying the new property first and then selling your old property later (reverse exchange), trading the property with another property owner for theirs on the same day (simultaneous exchange), and buying a property that is much cheaper than your old property and then using the remainder for improving the property (construction/improvement exchange). It’s important to speak with a professional about the available options to determine which one would best suit your circumstances.

3. You Don’t Have to Lose Your Old Investment

Most people feel bad about selling their current investment property and then having to buy a new one because there’s a risk that they could lose money on the deal. With a 1031 exchange there’s still a possibility that you might not come out on top, but at least you know that you won’t be paying capital gains taxes on the sale, so you’ll get every penny you’re owed and will be able to use all of that money for the new property purchase. The idea of selling your current property and receiving less than it’s worth or less than you paid can be extremely frustrating. With tax deferral you have the comfort of knowing that you’ll be getting back full price and you’ll be able to put all that money towards another property to replace your previous investment.

4. It’s an Easy Process

Conducting a 1031 exchange really isn’t that difficult, and it’s pretty much an identical process to buying an investment property any other way except there will be some additional paperwork to file to ensure you’re in compliance with the tax deferral program. If you’re already thinking about selling your old property then it makes sense to give this option strong consideration because it will only be saving you money, and with the rate of taxes on such a large sale, it could be a sizable chunk of change. Of course, it won’t be very easy if you attempt to handle it all by yourself, but with the guidance of an agent who has experience in these matters, you should have no problem closing the sale and acquiring a replacement property without any hiccups.

5. It Gives You a Second Chance

Owning investment property that you still owe a lot of money on can be a huge burden, especially if it isn’t earning as much money as you thought it would. It can feel a lot like you’ve missed the boat and there’s nothing you can do to get out of the situation you’re in. However, a 1031 exchange gives you the hope that if you were to sell the property you could at least keep the portion that would otherwise be devoted to capital gains taxes and other related fees.

Purchasing a new investment property that has the same value and similar loan conditions to your previous property ensures that you’re simply transferring the funds from one asset into another. In this way, it’s a lot like getting a second chance with your investment funds. Aside from that, even if you’ve done a great job earning a profit form the property, why not take advantage of the 1031 program to further increase your profit by not having to pay taxes on the sale when you decide to move on to your next investment.

Doing Things Right the First Time

In closing, it’s very important that you do things by the book and follow the guidance of a trained professional when conducting a 1031 exchange. Failure to do your due diligence and file the appropriate papers could result in an audit from the IRS, which is a hassle that could easily be avoided.

Ultimately, the process is simple enough that you shouldn’t run into any problems as long as you go about it reasonably and with discretion. The most important thing you’ll need to consider will be which property you’re going to choose as the replacement, as this will determine whether you profit or lose from the deal in the long-term. If you can cover all of the aspects mentioned above then you should be able to arrange a deal that you won’t regret.