One of the most basic investment decisions that an individual can make is to consider investing in property. After all, money sitting in a bank can lead to wasted opportunities, especially when you can attempt to augment your cash flow through some well-placed investments. With property in your name, you can use it, have it rented, improve it, or resell it—thus putting your money to work for you.
These investments come with a number of factors that can reduce the value of your investment, such as tax and depreciation. In order to attempt to minimize this blow, more experienced investors are using a legal life-hack to lower the tax they pay through the 1031 tax-deferred exchange.
What is the 1031 Tax-Deferred Exchange?
Based on the Internal Revenue Code Section 1031, the 1031 exchange allows an investor to defer all immediate taxable liability upon selling a property investment. In a gist, this can be done under the premise that you will be purchasing an investment of a similar type in the eyes of the IRS.
What is it used for?
While the specific requirements to be able to utilize this can restrict its abuse, the more wary and strategic-minded investor can seek to utilize this tax-deference scheme to a positive effect. To help you fully understand the potential of it, here are three reasons why the 1031 Tax-Deferred exchange is worth considering.
Targeting increasing purchasing power
Less tax paid means more money in the bank. This basic logic can easily encapsulate why the 1031 exchange is potentially one of the best opportunities for an investor to polish and extend their portfolio.
For one, the money saved from the tax deferral can be used as leverage to buy a more expensive investment property. This instantly signifies a positive gain for you, as it would automatically improve your portfolio while minimizing the money you’re putting out.
Next, through proper utilization of your resources, you can actually pick out an investment property that has the potential to generate passive income—thus striving to increase your overall cashflow. A vacant plot of land, for example, can be sold to buy a commercial building—granting you an avenue to seek to introduce cash flow from your investment.
Targeting easing of maintenance requirements
One of the biggest troubles with having properties as investments is its trait of depreciating over time. While a vacant plot of land may not incur too much of a regular cost, having a structure will demand that you shelve out a regular amount to keep it well-maintained.
Through this method, you can ease the blow of shifting towards a more low-maintenance investment—making it ultimately more worth your money in doing so.
Targeting diversifying your portfolio
The best reason to take advantage of the 1031 exchange is that it can give you an opportunity to diversify your portfolio. You can exchange a particular property for one that’s in a growing area—allowing you to potentiallyreap a bigger benefit when it becomes more developed, thus increasing the price of land and property.
As an investor, your overall goal is to make the most out of your money, which is why taking advantage of all possible opportunities is a must. Through the 1031 tax-deferred exchange, you don’t just get to save on tax, but you also get to strive to improve your portfolio in a large manner.
Are you looking for a real estate investment management service in the US that knows how to utilize the 1031 tax-deferred exchange to your benefit? Get in touch with us now and see what investment properties may be the best fit for your portfolio.