Building Wealth Through Real Estate: What You Need To Know About 1031 Tax Exchanges

Buying and selling real estate can be a great way to build your wealth. Investment properties are also a great source of passive income. The use of 1031 tax exchanges when buying or selling rental properties can help you to achieve both of these goals when used properly. However, as with many tax laws, the rules that govern these exchanges can be extremely complex. Taking the time to review the information below can help you to better understand how these tax exchanges work, the benefits that they have to offer, and how you can begin to put these benefits to work for you.

How 1031 Rental Property Tax Exchanges Work

The IRS tax code 1031 allows investors the opportunity to defer what is known as a capital gains tax when swapping one investment property for another. Essentially, what this means is that, rather than paying capital gains taxes on any profit that is earned when selling your rental property, you are able to defer this tax obligation by reinvesting that property in another rental property. In order to qualify for this type of tax deferral, you will need to meet a variety of deadlines and ensure that both the sale of your old property and the purchase of your new property fall within the 1031 guidelines set forth by the IRS. This is where things start to get tricky and will require you to get secure the services of a qualified tax accountant or attorney.

The Benefits That 1031 Tax Exchanges Offer

The benefit of using a 1031 tax exchange is rather straightforward. Imagine that you were required to pay income taxes on any profit that you made each time you sold a rental property. When selling multiple properties over the course of your investment career, these taxes can represent a significant out-of-pocket expense. Through the use of 1031 rental property tax exchanges, you are able to defer this tax obligation and pay capital gain taxes only once, when you finally decide to cash in on your investment years later. 

Putting 1031 Exchanges To Work For You

Even if you feel you have an excellent handle on all the rules governing 1031 exchanges, you will not be able to benefit from these tax laws without some assistance. This is because 1031 tax laws prevent you from ever receiving physical control of the capital gains from a real estate sale before these funds are then reinvested in a new property. Consequently, you will need to work closely with a qualified professional that is able to act as a middleman and receive these funds on your behalf. 

To learn more, contact a resource that deals with rental property 1031 tax exchanges.