5 Benefits of 1031 Exchange

5 benefits of a 1031 Exchange
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What Benefits Are There In A 1031 Exchange?

The 1031 tax-deferred exchange is a widespread facility that both new and experienced investors make the most of. Tax-deferred exchanges existed since 1921. One of the crucial benefits of the 1031 exchange is it allows you to dispose of a property without spending anything on capital gain tax liability. This facility gives more purchasing power to investors.

A Delaware Statutory Trust (DST) is an attractive option for investors looking to defer taxes on the sale of investment property through a 1031 exchange. A DST is a trust created under Delaware law that allows investors to pool their resources and purchase property that would be too expensive for them to purchase individually. The property is then managed by a professional trustee, who is responsible for ensuring that the property is properly maintained and operated. The trust is also required to file periodic reports with the Delaware Division of Corporations, providing investors with transparency and accountability. In addition, the Delaware Court of Chancery has Jurisdiction over DSTs, providing investors with another layer of protection. For these reasons, DSTs offer many benefits for 1031 exchange investors looking to defer their taxes.

Veterans believe there is nothing wrong with utilizing this facility to the fullest, especially with significant property appreciation and strong economic growth in recent times. It not only boosts the purchasing power of investors but also offers many other benefits when it comes to income and cash flow.

  1. Diversification or consolidation

1031 exchange gives you the flexibility to swap one property for many others. Investors usually look to diversify their portfolios as much as they can. This is one of the easiest ways to consolidate multiple properties into a single unit. You can acquire property anywhere as long as it is in the United States of America.

For example, you can exchange two duplexes and get a retail strip center. Or maybe exchange one luxurious property for three properties in a developing area. This system works both ways as long as you have a property to exchange.

  1. Increased purchasing ability

    Generic modern empty unoccupied office building suitable for 1031 investment

Suppose an investor has $380,000. These are funds available for reinvestment without 1031 exchange facilities. This amount also does not include state capital gains. However, with the 1031 exchange, the funds available for reinvestment become $460,000. That means the investor has an additional $80,000, thanks to the 1031 exchange system. Many investors prefer taking loans after calculating the funds available after the 1031 exchange.

The lender confirms a 60% loan to value ratio. The lender now has $128,000 additional purchasing power. You can pay the loan while acquiring new properties and selling old ones.

  1. Leverage

Every investor wants to acquire valuable investment properties. 1031 tax-deferred exchange allows you to get valuable properties by exchanging multiple low-priced accommodations. Usually, investors think of paying IRS in taxes. That is one way of utilizing money. But if you don’t want to follow that trend, you should pay attention to the rules and regulations of the 1031 tax-deferred exchange. It helps investors to increase their down-payment amount and also improve their buying power to get more expensive properties. It will ultimately help them leverage their cash and build wealth using real estate investment as their primary weapon.

  1. Increased income or cash flow

Investors are always on the lookout to increase their cash flow and income. It is what encourages them to spend more to earn more. 1031 exchange can improve your overall income and cash flow to a great extent. For example, you have acres of vacant land that have no value for you. However, it has a high market value. You can exchange the land for an apartment building or a commercial building.

  1. Management belief

Investors who have multiple rental properties often face costly maintenance charges. Plus, intensive management may not be their cup of tea. It leads to confusion, and investors want to get rid of a few properties to make management easier. That’s when the 1031 exchange can help such investors. You can decrease time and increase profits by exchanging high maintenance rental properties for leased properties and apartment buildings. It will leave you from the headaches of high maintenance costs and frequent management issues.

1031 tax-deferred exchange is a blessing for investors. It gives you tons of opportunities to exchange your properties and reinvest your money in better buildings and apartments. Investors understand which deal works for them. If they fall short of cash, they always have lenders to cover their back.

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About the author

Nathan Tarrant

Nathan has worked in financial services, marketing, and strategic business growth for over 30 years. He was the founder and COO of a Queens award-winning financial services company based in the UK.

He operated as a financial & alternative investment advisor to delegates of the UN, World Health Organization, and senior managers of Fortune 500 companies in Geneva, Switzerland, after the 2008 financial crash.

Today he is head of operations and marketing for Alphascend Capital Group based in Virginia.

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