Are you looking to finance your next buy-and-hold property? Consider trading up your current investment property with a 1031 exchange. Not only will this supply funding for your new investment, but it will also allow you to grow your tax-deferred wealth.
Here’s how to fund a buy-and-hold property with a 1031 exchange.
A 1031 exchange is the process of trading one investment property for another. The purpose of a 1031 exchange is to defer capital gains taxes. By exchanging properties, you avoid realizing any of your financial gains, which means that you don’t have to pay taxes on those gains immediately (you will have to pay the tax on all your gains when you eventually sell your tax-deferred assets).
If you were to sell a property traditionally, you would be responsible for paying capital gains taxes on the profits. But with a 1031 exchange, you don’t actually receive any profit because your gains are immediately rolled into a new qualifying investment.
You can sell a current income property and roll the proceeds into your new buy-and-hold property tax-free as long as both properties meet the qualifying criteria and adhere to a strict timeframe.
Before closing on the sale of your current investment property, you’ll need to seek the exchange services of an Accommodator. This third party holds the funds between the sale of the “relinquished” property and the purchase of the “replacement” property.
Basic property qualifications:
Basic timeframe requirements:
This type of exchange comes with advantages and disadvantages.
You might already have the funding you need for your next investment property tied up in your current investment property. A 1031 exchange allows you to trade up to a new property without incurring an immediate tax bill for the gains on selling your current property. Be sure to invest some time in learning the ins and outs of 1031 exchanges, so you're ready to take advantage of one.