Flattening Market May Provide Opportunities
Over the past several years, investors have seen their real estate investments appreciate at incredible rates, and in turn, have a large amount of built up capital gain. If the market begins to soften, investors may wonder whether it make sense for them to sell their property and do a 1031 exchange? In many cases, the answer is "yes."
In addition to capital gain, almost all real estate sales involving improved property trigger the recapture of depreciation. Section 1250 of the Internal Revenue Code requires that depreciation be recaptured at the current rate of 25%, which is higher than the current long-term capital gains rate. For this reason, the ability to defer the recapture of depreciation may make a 1031 exchange very attractive.
Aside from deferring built up capital gain and depreciation recapture, there are even more reasons to consider doing a 1031 tax-deferred exchange in a flattening market. A 1031 exchange gives the investor a tremendous increase in purchasing power and provides the benefits of leverage, diversification, management relief, and increased cash flow/income.
- Leverage - Investors can take advantage of the 1031 tax deferred exchange to acquire a more valuable investment property. By utilizing the money they would have paid to the IRS in taxes, they can increase their down payment and acquire a more expensive replacement property. Thus, leveraging their cash and continuing to build wealth through real estate investment.
- Portfolio diversification – Investors can sell one larger property to acquire numerous smaller properties at potentially flatter prices or relocate investment properties to another area of the country with faster appreciation.
- Management Relief - Investors that own several rental properties are often faced with the burdens of intensive management and costly maintenance-which often leads to increased headaches! An investor can increase profits and decrease time and effort by exchanging out of high maintenance rental properties and consolidating into an apartment building or NNN leased investment.
- Increase Cash flow - Investors can exchange raw land which produces no income for an improved property which can be rented to create positive cash flow.
- Exchange from fully depreciated property into to a higher valued property that can be depreciated further.
The value of a 1031 exchange is considerable, even as pricing stabilizes. Leveraging the cash that would otherwise be paid in capital gains taxes and/or depreciation recapture makes sense in any market and a 1031 exchange is the vehicle to get it done. Contact us prior to selling to set up your next exchange.