Understanding the 1031 Exchange and How it Affects Investors

By David Wieland, CrowdFund Beat Guest Post,

The following is a guest post written by Realized Holdings, a valued WealthForge partner who helps investors reinvest their 1031 equity.

With commercial real estate values at an all-time high, there’s been a lot of buzz about 1031 exchanges. Why all the excitement? For starters, investors can save 30% to 40% in taxes on the sale of their investment property by completing a 1031 exchange. While tax code may be boring, saving money is not.

A 1031 exchange allows investors to defer payment of capital gains taxes when they sell properties by reinvesting or “exchanging” their equity into “like-kind” replacements. By effectively shelving the taxes, 1031 exchanges are a powerful tool for preserving capital, increasing recurring tax-advantage income, accumulating wealth and facilitating tax-free generational wealth transfer.

Realized estimates that in 2016, individual investors will complete 285,000 1031 exchanges, representing $67 billion of equity and $187 billion of properties purchased.  On average, each of these individual investors will defer capital gains-related taxes equal to 34%. This begs the question, where else can an investor make 34% inside of 180 days?

So, what’s the 1031 exchange catch? The IRS gives investors a ridiculously short 45 days to identify replacement properties. All too often, this forces the investor to choose between paying taxes or overpaying for inferior properties that do not meet long-term financial and lifestyle goals. Additionally, there are many procedural rules to follow which, if missed, may result in the full tax burden being due, even though the investor purchased another property.

Given the magnitude of the overlooked 1031 exchange market, understanding the 1031 exchange process may be of significant value to you, your investments and business.

1031 exchanges are nothing new — in fact, they’ve been around for nearly 90 years. However, recent innovations are leading to custom solutions for high net worth investors that you may not have thought possible. A few examples include:

  • Investors with more than $250,000 of 1031 equity can now reinvest in individualized portfolios of institutional-quality properties offering long-term, tax-advantaged, passive income.
  • Investors with more than $1 million of 1031 equity now have the option to pull out up to 90% of their equity after completing a 1031 exchange and use it any way they wish, without triggering capital gains tax consequences.
  • Investors with more than $10 million of 1031 equity now have custom ‘parking’ solutions that give them years, not months to find replacement properties.

Stay tuned for new offerings from Realized involving 1031 exchanges in the coming weeks. Make sure to check back on The WealthForge Network for more information. If you have further questions or want to learn more, email Diana Alderbashi at dalderbashi@wealthforge.com.

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