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How To Avoid Capital Gains Tax On Real Estate — 1031 Exchange

30 April 2020

With a 1031 Exchange, you can avoid paying capital gains taxes on the sale of an investment property if you reinvest the proceeds from that sale into another property of equal or greater value (and within a certain timeframe). Tax optimization tactics like a 1031 Exchange are what will enable you to preserve and growth your wealth faster!

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To grow your wealth faster, you need to find ways to reduce your taxes and reinvest your gains — a 1031 Exchange allows you to do just that!

With a 1031 Exchange, you can avoid paying capital gains taxes on the sale of an investment property if you reinvest the proceeds from that sale into another property of equal or greater value (and within a certain timeframe).


How do 1031 Exchanges work?

Rather than having to pay taxes at the time of sale, it let's you instead put that capital to work!

Your proceeds can fund new investments, which enable you to generate even more cash flow and appreciation.

While you eventually have to pay taxes on those new properties, your funds will have gone further and you'll have created more wealth in the end.

1031 Exchange can be a huge tax advantage and it's relatively straightforward to do them yourself.

So, let's say you are making a couple hundred thousand dollars of profit on a property. If you are taking those profits as is, you will face significant taxes. However, if you reinvest those profits into another property within 180 days, you can defer paying those capital gains.

Why 1031 Exchanges matter?

If we can defer our taxes, that will enable our wealth to grow and compound more aggressively. Somebody that is paying taxes on their capital gains every single year is going to have a smaller pot over time.

Even though we'll have to pay more taxes at some point in the future, we'll have a much larger piece of wealth. Instead of parting with our money through regular tax payments, we're able to continuous generate greater cashflow cash-flow and appreciation on that capital instead.

It's not just for professional investors

There's a common misconception that 1031 Exchanges are only for professional investors, people buying offices or condo buildings. However, individual property owners can also take advantage of 1031s if they have rented the unit or building for at least 2 years.

So, if you're just a single homeowner and keen on growing your wealth, instead of just simply selling your house it's worth considering a 1031. You can rent your place out for a couple of years,, then reinvest your profits into another similar or larger property shortly thereafter.

And just like that — you can defer all of those capital gains and expand your portfolio!

What about international deals?

This applies to Americans, as well as anyone owning real estate in the US.

For Americans, this even applies if you happen to own international real estate. If you happen to own a place in Colombia or the Caymans, you can reinvest that into other foreign real estate, as long as you're putting it back into real estate.

Growing your wealth faster

Hopefully it's clear that 1031 Exchanges are one of the more important ways to save on taxes when selling real estate.

We've talked before about some other ways to minimize taxes on real estate — depreciation, homestead exemption, deductions, etc.

Remember, this is how you grow your wealth faster! Rather than continuously parting with a portion of your profits (i.e. capital gains taxes), there are ways to keep more of your money, put it to work, and generate even more value from that capital.





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