Magazine article Black Enterprise

Trading Spaces: The 1031 Exchange Is a Handy Tool for Building a Real Estate Portfolio

Magazine article Black Enterprise

Trading Spaces: The 1031 Exchange Is a Handy Tool for Building a Real Estate Portfolio

Article excerpt

Swapping homes is not just a good idea for a makeover reality show. Knowledgeable real estate investors can sell one property and buy another without having to pay federal capital gains taxes on the transaction, at least not right away.

The capital gains tax from the sale can be deferred until the replacement property is later disposed of. How? By using a "like-kind exchange," nicknamed a "1031 Exchange" from the IRS code section.

When a property owner reinvests the sale proceeds into another property, the financial gain has not been realized in a way that generates funds to pay any tax. In short, the owner invested rather than pocketed the proceeds, which otherwise would be taxable.

Investors who manage their real estate portfolios wisely can make money regardless of market cycle ups and downs. Taking advantage of tax-saving strategies such as the 1031 Exchange can further leverage their profits.

"The 1031 Exchange is an excellent tool for building real estate portfolios, and it's also great for small businesses," says Hugh Pollard, president-elect of the Federation of Exchange Accommodators. Both properties must be used for business or investment purposes. "For those building a portfolio, deferring tax means the investor has more money available for the purchase of a new property. And for small businesses, it trees up capital to perhaps buy a larger facility or obtain a better location."

Although anyone who owns investment or business property is eligible for this tax deferral benefit, Renee Collins formerly of RKC Tax and Financial Services, points out that "The IRS has a strict definition for like-kind exchanges that must be adhered to. …

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