Real Estate Investors and 1031 Exchanges

Filed under: Investment Property

I’m seeing a bunch of investor activity over the last few months, and it’s worth pointing out. Investors are looking at their current rental properties, and they are seeing that maybe they have hit the peak for now. So they are taking the cash off the table, and now they are using this big chunk to buy 2 – 5 properties from the sale of one.

Using a 1031 Exchange to Defer Taxes

Why would you do that right now? It makes sense for several reasons. To start, each of these have utilized a 1031 exchange. That means you get to take the full amount and defer the taxes. Whatever you net out of the property, when you don’t use a 1031 exchange then it means that you pay capital gains now. Then you use whatever is left to re-invest (in real estate or any other type of investment). This means you are using after-tax dollars.

A 1031 allows you to take the full amount, reinvest it, then you defer the tax until when you sell the next property – or you can use a 1031 again.

Speeding Up Equity Gains

Lots of planning needs to happen for the long-term strategy. But that’s what many of my investor clients have done to utilize the 1031 exchange.

With this process, you have one property that is gaining equity at 5 – 20% and put it over 2 properties… which means it is spread over a few properties which increases the gains that much faster. The nice thing is that these properties still cash flow.

Always Focus on the Long-Term Strategy

I’m not a proponent of pulling all the equity and buying as much as you can. I think you need to do it in a sane and strategic way. But, if you are doing it right, taking the long-term approach, and finding the good properties, then there is a lot of potential. I’m seeing a lot of investors doing that right now.

It’s a little unusual in the real estate industry right now because prices are up and interest rates are up. But investors are just looking at it very straightforward. Can I get cash flow off of this property? Does it have potential for a long-term increase in value, regardless of what happens in the next couple of years?

It doesn’t matter how much the property is worth until you are ready to sell it. So, all that matters in the next few years is all about cash flow. So, keep the long-term view in mind.

Do you have questions about buying your first investment or getting into multiple investments? Talk to me about financing. I’m here to help you figure out if it makes sense for your situation.

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