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MAXIMIZING YOUR REAL ESTATE INVESTMENTS: THE BENEFITS OF A 1031 EXCHANGE
Tax Deferral: One of the primary benefits of a 1031 exchange is the ability to defer paying capital gains taxes on the sale of investment property. Instead of paying taxes on the sale and sacrificing purchasing power, the taxpayer can leverage all of the proceeds for one or more replacement properties.
Portfolio Diversification: A 1031 exchange can allow investors to diversify their investment portfolio by exchanging property in one market or industry for property in a different market or industry. For example, selling a commercial property and purchasing a residential property and a smaller commercial property.
Cash Flow Improvement: A 1031 exchange can provide opportunities for taxpayers to improve their cash flow by exchanging a low-performing property for one with higher performing rental income.
Estate Planning: A 1031 exchange can be a useful tool for estate planning. When heirs inherit property, they get a step up in basis, meaning that the gain that was deferred is NOT inherited. Strategic exchanging can also result in diversifying the portfolio into assets that can be more easily divided amongst heirs.
Location: Some investors have relocated their primary residence to a different state but still want to actively manage their investment property. Fortunately, the 1031 Exchange provides an opportunity for tax deferral even when crossing state lines. It’s important to note that California and several other states have claw-back provisions in place that require proper documentation to be filed. While exchanging from one state to another is permitted, make sure to follow the necessary procedures to avoid any tax-related issues.