Real estate investment requires careful consideration and longterm planning. The buyer must consider the cash flow, investments, expenses, tenant leases and prospects for a profitable sale. A key consideration is the taxes upon sale of the property. That is why so many investors reinvest the proceeds of their investment into more real estate through 1031 exchange companies. By doing so, the investor avoids the punitive property sales tax and can purchase a larger property with better cash flow.
Smart investors take advantage of this tax loophole by utilizing real estate exchange services. These services help to avoid federal capital gains taxes that are paid upon the sale of an investment. Instead, investors can reinvest the funds into another property without paying the taxes. If the property has increased in value or even if some of the mortgage was paid off on the original property, the investor will be able to purchase a more valuable real estate project for the second deal.
Real estate exchange services help the investor to execute the second deal without the tax consequences that can make it unworkable. For example, an investor buys a condo as an investment for $100,000 with $20,000 down payment and $80,000 in debt. Over several years, the mortgage is paid down to $50,000 and the property increases in value by $50,000. Upon the sale of the property for $150,000 the investor will retain the $100,000 in proceeds. Ordinarily, this would result in a capital gains tax of $22,000. However, if real estate exchange services are used, the entire $100,000 can be used to buy a new property. Perhaps the investor can buy a $500,000 property with the $100,000 down payment. In this way, the investor is making a tremendous increase in net worth through the magic of good financial planning.
1031 exchange companies make this increase in value possible. For good investors, it is worth having deep knowledge of this area and work with the most reputable firms possible. Whether you are investing in residential, commercial or industrial real estate, the strategy is a winner in all cases. Both small and large investors alike, rural areas and big cities all use this strategy. Without this knowledge, investors are left with much less value.