As we kick off the new year, did you know that a 1031 exchange can potentially improve your cash flow? Who wouldn’t want to start off the new year with an increase in cash flow!

Here’s how:
In a 1031 exchange, you are required to use the proceeds from the sale of the relinquished property to acquire replacement property (or properties). There is a lot of flexibility in choosing replacement property and that is where strategy comes into play.

For example, let’s say that you currently own a rental property that generates monthly rental income – the property is fully paid off, so that’s pure profit in your pocket. Why mess with that property some might ask? One could easily argue that this particular property has peaked, aside from a minimal annual increase in rent. Many savy investors would take the opportunity to pull the equity out of this property and invest it in other property(ies).

This strategy enables the investor to diversify their portfolio, from one property to multiple, or to transition from one residential (Single Family) to commercial or multi-unit property. Or depending on financing, maybe both? Most investors use the exchange as an opportunity to buy up in value. Splitting that equity between multiple properties and using personal funds or borrowed funds to make up the difference is a great way to grow your portfolio and increase income potential. Assuming that the replacement property is of similar or greater value to the relinquished property, you can complete a 1031 exchange and defer paying capital gains taxes on the sale of the relinquished property.

By doing your research and locating the right properties, even with a mortgage payment you could still improve your cash flow and generate a higher return on your investment. It’s important to note that there are no guarantees that a replacement property will generate higher rental income, and there are risks associated with any investment. However, a 1031 exchange can provide opportunities to improve cash flow and potentially increase investment returns by exchanging a low-performing property for one with higher rental income potential.

The information contained herein is given as general information and informal strategy and should not to be construed as a legal opinion or tax advice. Each exchangor has the responsibility to seek legal and/or tax advice from their tax and legal advisors to ensure the tax benefits anticipated in the exchange.