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Don’t Ignore the Benefits of a 1031 Property Exchange

If you’re not going after 1031 exchange properties in Utah, you could be leaving money on the table. Most people get into the commercial real estate sector because it promises a great return on investment. You get steady monthly income as long as you can keep the property occupied.

Therefore, it’s worth exploring every available measure that can help your investment get to the next level. One of the most rewarding and often ignored methods involves forming a partnership with the federal government, more specifically the Internal Revenue Service (IRS).

As strange as it might seem, the IRS wants you to thrive when investing in the sector.

What is a 1031 property exchange?

Recognizing that the high asking prices were discouraging investors from getting into commercial real estate, the IRS came up with a unique solution. The agency figured out a way to help investors increase their buying powers when playing the sector.

Section 1031 of the Tax Code lets you defer paying capital gains tax after making a sale if you choose to reinvest the proceeds into the industry. In this case, you will be swapping one commercial building for another one located anywhere in the country. One of the main catches here is that all the properties involved must have commercial use.

What does it entail?

The IRS lays out strict guidelines to walk you through the entire process, and you must follow them to the letter in order to qualify. You need to make an application to be cleared for the exchange, after which you have 45 days to identify the replacement property.

After that, you have 135 days to dispose of the current property and seal the deal on the new acquisition. In total, you have a180 days to complete the process.

These deadlines are cast in stone and missing any of them means that you lose the benefits that come with it. It means, though, that you would you have to cede a considerable portion of the sales proceeds as capital gains tax.

What are the benefits?

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Other than deferring tax on capital gains, taking part in such an exchange also bears other benefits. You will have deeper pockets when buying the replacement property, which means that you can buy a more lucrative property.

It means that you can let go of an investment that is performing poorly on the market and get one that is thriving instead. You could also switch the form of the property you’re holding.

For instance, you could trade a block of apartments for a mall or an office block in a different place in the country. The new property can be of equal or greater value capped at twice the value of your current property.

The government is eager to help investors in the commercial real estate sector thrive by letting you defer capital gains tax indefinitely. Such a move increases your buying power, allowing you go after more valuable properties on the market.

It also means that you can make a lateral transition for one form of commercial property to the next, helping you to escape bad markets and increase your earning potential. Taking part in a 1031 property exchange can prove to be an asset to your investment strategy in the real estate sector.

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