After doing this for 20 years, I have found that the 1031....

[Jorge Vazquez]

After doing this for 20 years, I have found that the 1031 rule is a potent tool for real estate investment professionals for several reasons.

First, deferring taxes means you can keep growing and diversifying your portfolio a lot more quickly than if you had to pay standard tax rates on every transaction. With the 1031 rule, you can essentially “swap up” your properties indefinitely and still benefit from tax deferment. Smart real estate investors use the 1031 rule to swap out an undesirable property, and then use it again to swap out the new property they’ve acquired. This process can be repeated over the long term to assure that your portfolio continues to grow without paying taxes at the time of sale.

Second, the 1031 rule’s power is due to its incredible flexibility. For example, when you designate replacement properties, multiple properties can be designated as potential replacements. You can designate up to three properties, as long as you close on one of them. Or, for multiple property transactions in one exchange, the total value of the potential replacement properties can be up to 200% of the value of the property you are relinquishing. That means that after 45 days, you still have wide leniency to negotiate the best possible exchange and close within the time limit.

Furthermore, the properties that the IRS defines as “like-kind” don’t have to be identical. Essentially, all real estate for investment purposes is designated as “like-kind”: you could exchange a rental property for unimproved land, and still qualify for the 1031 rule. Since the classification of “like-kind” property is so broad, the 1031 rule is a powerful tool to diversify your portfolio while deferring tax payments.

By not paying taxes at the time of sale in exchange, investors have a lot more capital to work with and can bid for higher-value properties through an exchange facilitator. By allowing such wide flexibility, the 1031 rule encourages creative deals and is widely powerful as a tool to expand your real estate investment portfolio. 

What is your experience?