A profitable option is to conduct a 1031 tax exchange…

As a player in the real estate game, you must be aware that dollar that you have working for you is compounding your wealth, and, conversely, that every dollar not working for you can be considered a missed chance to further compound your profits. So, when it comes time to put your property up for sale pay capital gains taxes . Every time you pay money to the U.S. government you are throwing away potential profits.

The second and more profitable option is to conduct a 1031 tax exchange. A great way to keep more of your investment funds making you more money is to perform a 1031 tax exchange rather than making an outright sale. A 1031 exchange has a non-recognition provision; this means that you aren’t obligated to pay the taxes immediately following your sale; as a matter of fact, your capital gains liability are deferred for an indeterminate time span, while your funds are compounded by the extra income produced by investing your tax deferment.

To demonstrate, let’s say that you own some small investment properties, like triplexes or duplexes, whose values have increased over time. At this point, your first inclination may be to sell these properties and collect on your investments. But a wise investor with an eye to the future might decide to conduct an exchange and place the money gained from these investment properties towards the purchase of another piece of property, which will, itself proceed to appreciate in value over time and continue to compound your wealth. Best of all, the money available to you as a result of deferring capital gains taxes will function to heighten your ability to leverage for greater loans, maximizing your potential profits.

1031 exchanges are not limited to just buildings and land, either. It is possible to conduct a 1031 exchange on any real estate held for investment in a business or trade, as well as certain types of personal property, from cranes or backhoes to an aircraft or collector car. 1031 exchanges are especially advantageous for those who have money in antiques or collectibles such as collector cars, in light greater capital gains liability on the sale of these types of items. You cannot, however, exchange things like stock, bonds, or interest in an REIT.

So, next time you are in the position to sell a piece of real estate or other investment, pause for a moment and consider the profit you could reap were you to conduct an exchange instead. If you decide to conduct a 1031 exchange instead of selling outright, you can maximize your wealth and come out ahead.