How a 1031 Exchange can Make You Millions
For longtime investors, many times they follow a certain formula, where they start with a certain amount of money, buy property, have growth that’s consistent, and from there, they reinvest this. Plus, they also put their down payment as a 30% on the future deal, and you may notice that it’s a good formula, but the numbers are different due to taxes.
With this, we’ll tell you how this can help you and how a 1031 exchange can make you millions, but we won’t put in the closing costs, depreciation, any loan pay downs, flow of cash, and other expenses and income that’s listed. But let’s take an investor that purchases a property worth 250K, and after 5 years, it can be sold for about 319K. Usually, the entire profit of that can be used with the equity at this point to work towards the next deal, and this continued on for 25 years with no taxes, since a 1031 exchange was used.
In contrast, if you don’t use a 1031 exchange, it can actually affect it by up to a million dollars. In some cases, people have trailed behind by that, and you can take the money the government gives to you to work with the 1031 exchange, which helps to build greater wealth. The 1031 exchange is actually a tax deferral, not avoidance, but it does make a difference when you finish up with investing.
Some investors like to at the end of this exit the entire game completely, cashing in everything and leaving, and then they decide to pay the IRS what they owe. But, at this point, they’re not just paying taxes on the final property, but on all of the properties that used this. Because this is carried forward, I can be very hard for this. If you do opt for this, by cashing and paying the tax, you will have more income than if you paid taxes each time.
Some investors like to hold onto the properties until they die, and giving them to heirs. The benefits of this are that the inheritance has a property that doesn’t’ have tax consequences. The heirs could then sell this and pay very little tax. But of course, there are special rules that accompany this, especially for the wealthy, so make sure that you talk to a professional about this if this is a path that you want to take.
If you don’t’ want to do this, you essentially trade the properties that are easier to manage, such a doing a 1031 exchange on the equity of a multimillion-dollar mall, as part of a syndicate with other investors, or trade this within a leasing network where the tenant pays for everything and you just collect what is left.
With san jose ca real estate there are hundreds of ways to make money, so sometimes trading up to a more passive method is ideally the way to go.