Making profit is the principal aim of anyone who owns a business or holds a property for investment. Unfortunately, there are numerous things that can make this difficult and easily one of the biggest obstacles in the way of keeping any profits that you have earnt is capital gains tax.
Capital gains tax affects the sale of any property outside of your main residence and could see you being slapped with a tax bill of up to 20% of your total profit from sale. That is a considerable chunk of your profit and in some instances could be enough to make sustaining your business viable. Fortunately, there is a way to defer the amount owed – a 1031 exchange.
A 1031 exchange makes it possible for business owners and investors to defer the tax that they would have paid on their sale, provided that they choose to use it to purchase another like-kind property. However, not every situation or time is appropriate for a 1031 exchange.
Every property transaction is different. However, the following are some of the best times to consider a 1031 exchange.
If Paying Tax On Your Property Doesn’t Fit Into Your Budget
If you decide to sell your business or investment property without entering into a 1031 exchange, you will be liable to pay capital gains tax on any profit you have made on it. This means you will receive a hefty tax bill for up to 20% of your profit. If you have made even £50k on your investment, £10k of that will be swallowed up in capital gains. If you aren’t prepared or able to shoulder such a large tax bill, a 1031 exchange for like-kind property may be your best option.
If You Need To Purchase a Replacement Property
Whether your business is growing or diversifying, if you need different premises to accommodate it, you are far better opting for a 1031 exchange than simply selling your current property. This enables you to defer the tax you would have otherwise paid in capital gains and invest it, interest-free, in your replacement. This could boost your business or investment platform since you will be able to obtain something of a higher value that may have otherwise been out of financial reach.
If You Want To Generate More Monthly Revenue
If your current property isn’t forthcoming with a decent monthly revenue and you need to improve your cash flow, you could swap it for something that has the potential to generate regular cash income - for example, a rental home or a store.
If You Want Your Heirs To Get The Full Benefit Of The 1031 Exchange
We don’t want to be macabre here, but as we know, the tax deferment obtained through properly performed 1031 exchanges can be indefinite. This is because, if you die without having sold a property bought as part of a 1031 exchange, its value will be ‘stepped up’ to the fair market. Your heir will not only receive the property at this stepped-up market rate value, but all deferred taxes will also be erased.
Still not sure if it is the right time to do a 1031 exchange? Contact our experienced and knowledgeable exchange team at 1031 Exchange Advantage in Carlsbad, CA today to schedule a consultation (866) 944-1031.