iQuanti: Any savvy real estate investor has a plan to level up their portfolio in the future. Whether investors plan to acquire more properties or sell up into a property with more units, growth is one of the keys to investing success. The 1031 like-kind exchange has proven to be a huge help for real estate investors that want to upgrade their properties while deferring capital gains.
But are these rule-bound transactions available to the everyday investor, or is a like-kind exchange only for the real estate elite? Here’s how like-kind exchanges work and how they can benefit the everyday real estate investor.
What is a Like-Kind Exchange?
A 1031 like-kind exchange allows real estate investors to defer capital gains as they trade an existing property for another. The transaction, which takes place over a maximum of 180 days, involves a qualified third-party intermediary to oversee the transaction and handle the money exchange. The intermediary also helps to ensure the transactions follow the IRS code, so an investor doesn’t risk losing tax-deferred status on the exchange.
1031 Exchanges by the Numbers
Between 2016 and 2019, 84% of 1031 exchanges were completed by small investors in a sole proprietorship or S corp, according to a 2020 study published by the National Association of REALTORS®. The survey also revealed that half (52%) of properties sold in a 1031 were residential properties. That means most like-kind exchanges are not happening with the real estate elite but with small investors selling and buying residential properties.
How Does a 1031 Exchange Benefit the Everyday Real Estate Investor
There are several benefits of a like-kind exchange for real estate investors operating on a smaller scale, including:
Allows access to higher-priced properties: The 1031 exchange enables investors to upgrade into more valuable properties that they may not have been able to access without the tax savings from deferred capital gains.
Offers potential for higher income from properties: As investors upgrade their properties, earning potential is higher. Plus, investors could leverage a like-kind exchange to move from one higher-priced property to a portfolio of properties in a lower-priced area, thereby diversifying their income streams.
Creates jobs in the community: By deferring a hefty tax payment, investors may be able to afford to upgrade their new properties. A team of local workers is required for any remodel, which may include painters, contractors, plumbers, electricians, and more. Creating jobs is a side effect of a 1031 exchange that can help support communities.
Improves quality of life for renters: The tax-deferred savings of a like-kind exchange enable investors to put money back into their properties. As a result, the tenants living in those properties have a nicer space and improved quality of life.
The Bottom Line
A like-kind exchange can enable everyday real estate investors to upgrade their properties, create jobs in their communities, and earn more income from their investments. If you’re a real estate investor looking to perform a like-kind exchange, your realtor can be a wealth of information to guide you in the right direction to make the most of your investments.
Source : https://www.newswire.com/news/are-like-kind-exchanges-only-for-the-real-estate-elite-21645553