In this modern time, it seems that a lot of people are getting interested in investment. Most of them always think that you need millions of dollars before you can do so. There is truth in this statement, as most people who do this have a stable income. However, you do not need millions to invest but you need an ample amount of money to do so successfully. After all, this type of venture pays off well if you invest more of your income.
For most people, having multiple priorities can already be a blessing. This is a sign that you have already been well-off in life. Who has even more than one type of property these days? From your car to your house, these are already considered as possessions. Buildings, on the other hand, is for those who are in a more opulent lifestyle.
Doing Your Properties Right
These types of properties that involve real estate would usually have a tax attached to them. Aside from the purchasing tax, you need to pay for them to the government as this article says. This is because the estate is still under the country’s jurisdiction. You need to pay for it yearly so that it can still be recognized as your own. There are certain loopholes in this scenario, but it works for the most part.
Unfortunately, these taxes can be high. The government requires you to pay at least 15% of the total price of this property as tax. This is every year, but it can change based on the circumstances. For example, California requires at least 9.5% but the rest of the states follow the federal government. This is where they would get the income to do their duties as civil servants,
If you own a lot of properties like real estate, it can be hard to pay off these taxes. You may already have income trickling in from these ventures, but it is still painful to see them out. This is especially true if you think that you aren’t seeing where the money is going. You may need to scrutinize the government further regarding this. For the most part, though, they are doing their duties as a part of the governing regulations.
Now, on to our main topic for today.. This is where a 1031 Exchange can come and save you from these taxes. You can think of it as “legal tax evasion” but this process is a legitimate way for you to not pay the exorbitant amounts. However, there are some rules that you need to follow before you can successfully convert to a 1031 agreement.
What is 1031?
This set of numbers refer to Section 1031 of the US Internal Revenue Code, which refers to the idea that you can escape the government rules on taxation. However, you need to buy another property and reinvest it as a part of your capital. This process is ongoing, and it will not stop until your death. If you discontinue this while you are still alive, then you would need to pay for all of the taxes accumulated but this outcome may depend on the situation.
Before you freak out about that statement, there are some caveats that you need to remember. This exchange can happen depending on your discretion, and it will not push through without your consent.
Second, this can help you look into other properties that can help you diversify your portfolio. You can either pay the government the taxes that they are due, or you can reinvest all of that and start a new process. Learn on how you can manage here: https://www.smartaboutmoney.org/Topics/Insurance-and-Taxes/Tips-for-Filing-Taxes/What-You-Need-to-Do-Your-Own-Taxes.
First off, this entire process would include an intermediary. They are the ones who will hold the purchase of the new property before it can be given to the seller. Once you have decided to do an exchange, you can start looking for properties that are similar to what you have. This equivalence will make it easier for the government to see the exchange happening as well as to all parties involved.
Make the Change
Now, why would you want to do this exchange? There are several reasons why you may even need it. Aside from the non-payment of taxes, you would be increasing the number of your properties. You may want to combine some of them so that you would only manage less of it or you can separate so that you will have more. In the end, this would depend on your strategy as an investor and your circumstances as well.
Additionally, going through this exchange can help you reset the depreciation of your property. This happens to all types, aside from real estate. However, even buildings can have some damage to them and this can affect the original price. With 1031, this depreciation can be factored out of the equation and it will be added to the next investment instead. You do not need to worry about the lessened costs anymore.
Doing 1031 can be confusing, especially to those who are still new to the concept. You can always do your research first and see if it works for you. Meanwhile, you can always hire someone to assist you in this situation. This way, you do not need to worry if you are doing the wrong thing. An adviser can certainly look for other strategies that can help you maximize what you need and see where you are lacking as an investor.