Explaining a 1031 Exchange and Why You Should Take Advantage of One

1031 exchange explained

A 1031 Exchange is a powerful tax-advantaged investment vehicle that you should consider as a part of your overall investment strategy. The main thing a New Jersey 1031 exchange allows you to do is to purchase property and defer your state and federal capital gains tax to a later day. The tax deferral is good until the owner sells the property. While tax deferral is the most tangible benefit, there are plenty of other reasons to consider using a 1031 exchange which is why our title agency wants to take the time to explain how does a 1031 exchange work.

  1. Capital Gains Taxes are Costly
    As part of our recap on a 1031 exchange explained, yes, capital gains tax deferral is an obvious benefit, as we discussed but did you realize that the state and federal taxes will set you back 15% or more depending on where you live? Here in New Jersey, the state capital gains tax is 10.75%. It becomes a lot of money when coupled with a federal tax rate of around 15%. The deferral allows you to work with it instead of sinking it into the current year’s tax payments. Therefore, a 1031 exchange is among the common types of title insurance terms you may hear.

  2. Leverage
    Although you may have questions about 1031 exchanges, keep in mind that many successful property owners look at possible tax savings as a way to increase their purchasing power. The savings allow you to acquire additional investments instead of paying 15%-25% in capital gains tax as long as you maintain the 1031 exchange properties. If you need this aspect of a 1031 exchange explained further, we are happy to walk you through it.

  3. Diversification
    You shouldn’t rely on just one investment type to save and grow your money. We have all heard this since we started learning about investments. Finding different ways to invest your cash insulates you from problems in any single part of your investment strategy. The idea is to lessen the impact on your overall portfolio if one investment vehicle isn’t performing as you want it to. For example, a stock market dip may not affect your real estate’s value. A 1031 exchange is a great way to grow your money and defer taxes on that growth.

  4. Estate Planning
    While a 1031 exchange is an ideal way to defer taxes, many don’t realize how powerful this can be in an estate. Let’s say you purchase a piece of property for $100,000 and put it in an exchange. Twenty years later, the same property will be worth $300,000. Since you put it in a 1031 exchange, you have deferred taxes on 20 years of growth. When you pass away, the property will realize a stepped-up basis when inherited. This effectively wipes out the deferred capital gains taxes on that property without paying it. It also resets the value of the property at $300,000.

  5. No Limits
    When it comes to a 1031 exchange explained, it’s important to note that there are no limits to the number of 1031 exchanges you can complete. Many use this rule to grow their investment portfolio over time while deferring their capital gains taxes. However, you may not know that as the property’s value increases, you can continue swapping it out with other similar properties that may be better suited to meet your portfolio objectives, tax strategy, or income requirements.

Whether you’re shopping for title insurance or you need help with your 1031 exchange, at Cortes & Hay, we have decades of experience in helping people with 1031 exchanges throughout the United States. Contact us today if you want to learn more about this fantastic investment and estate planning tool. Our experienced team is happy to walk you through the process from start to finish.