How would you like the ability to sell one investment and then buy others with no tax consequences? With real estate, you can. This is another unique advantage of real estate.
Section 1031 of the U.S. Internal Revenue Code allows investors to defer capital gains taxes on the exchange of like-kind properties. Section 1031 specifies that if an asset is sold and the proceeds of the sale are then reinvested in a like kind asset, then no gain or loss is recognized, allowing the deferment of capital gains taxes that would otherwise have been due on the sale. Note that conditions and restrictions apply; seek professional advice before considering a 1031 exchange.
A 1031 exchange is not limited to just rental properties, it also allows you to "exchange" rental properties for land, office buildings, etc. A 1031 one exchange is also an excellent "exit" strategy. For example, over time you acquire a number of properties but you want to retire and not be bothered with the individual properties. Using a 1031 exchange you could sell all the individual properties and purchase a single tenant office building from someone offering (for example) a 20 year "triple net lease". With a triple net lease, the tenant pays all real estate taxes, building insurance, and maintenance and you receive a monthly payment. Tripple net leases are totally passive. Who offers such leases: food chains (McDonalds, Starbucks), the government (Post Offices), and many major companies who need buildings but do not want to tie their money up by purchasing property. The image below illustrates this progression.
1031 exchanges are the vehicle to wealth since you can expand your holdings over time without tax consequences. However, there are timelines and criteria that must be met to successfully do an exchange. All of the 1031 exchanges I have been involved with used an intermediary. Most frequently it was through a company named Starker Services who has agents in most states and offer excellent educational training. Below is a depiction of the process. Note that if you use a qualified intermediary like Starker Services, they handle all the complexities and handle all the tax paperwork. I strongly recommend you use such a service.
Thanks for your time.
Eric Fernwood (Realtor)
VIP Realty (Vegas International Properties)
7570 Norman Rockwell Ln., Suite 140
Las Vegas, NV 89143
© 2014 Eric Fernwood, All rights reserved. EricFernwood@gmail.com, 702-358-8884