If you plan to exchange your primary residence, it may be beneficial to consider exchanging into a residence with lower property taxes. A 1031 tax-deferred exchange is a way for this to happen. Here are the benefits of 1031 tax-deferred exchanges.
1. Tax Advantages
By transferring an investment property into a 1031 exchange, the tax benefit allows you to defer paying capital gains tax on the sale of your old residence. When you purchase the new residence, you can pay any capital gains tax you owe in installments or when you sell your new property. The capital gain is deferred and thus not subject to immediate taxation when transferring investment properties by using a 1031 exchange.
2. Use Your Capital Gains Taxes
If you plan on selling a property and have significant capital gains taxes due, you can use the tax bill to pay for your new residence instead of laying out your entire down payment.
3. Location is Everything
Taxes differ from state to state, county to county, and city to city. By looking at different counties and localities, you may have the opportunity to reduce your current level of property taxes by making a location change.
4. DIY
You can do the 1031 exchange on your own. It does not require a third party to complete your transaction. You must pay for the sale and purchase costs, and you will not be in taxation on any capital gains taxes you paid.
5. Minimal Paperwork
When transferring an investment property, minimal paperwork such as sales contracts, title abstracts, etc., is required when utilizing a 1031 exchange. As long as you follow the rules and guidelines set forth by the IRS, you will be able to complete the transaction without having to pay taxes on your capital gains.
6. Your Existing Credit Score
You can use a 1031 exchange as a way to rebuild your credit if you have experienced financial difficulties in the past few years. The IRS does not have a look-back period for tax-deferred exchanges, so your credit score will normally not be impacted.
7. Low or Zero Cost Transactions
Because there are no closing costs, you can save a significant amount of money using a 1031 exchange. You will have to pay for one cost when using a 1031 exchange, and it is the taxes on any capital gains you paid when acquiring your new residence. The good news is that this cost is minimal because the IRS only requires an 11% return on investments.
8. Exchange and Redevelopment
If you are looking to switch from a single-family residence to an apartment, you may want to look into a 1031 exchange. The drawback of using a 1031 exchange is that you are limited to properties that are either two or more bedrooms or two or more baths. In addition, there must be enough square footage for the proposed residents.
9. Reducing Your Expenses
If you are currently using more space than is required for your family, you may be in a better financial position if you decide to use a 1031 exchange. If the property you are currently using there is undervaluing, it may be worth it to trade out for a larger residence.
10. Lower Your Property Taxes
Using a 1031 exchange explained will help you to lower your property taxes. By trading up from a smaller residence to a larger one, you can be on the receiving end of a property tax reduction.
11. Lower Your Mortgage Payments
If you are trying to save money on your mortgage, skipping the first payment can help you achieve your goal. By doing a 1031 exchange, you can pay everything upfront when you purchase.
12. Lower Your Utility Costs
You can normally take advantage of lower utility rates in areas where you will be moving. If you choose to live in a higher-cost area, you can negotiate a lower utility rate because your property taxes will also be lower. In many cases, the greatest benefit of using a 1031 exchange is the reduced property taxes that accompany the new property.
13. Sellers Maybe more Open to Negotiating
If you hope to use a 1031 tax-deferred exchange to help you in the future when buying a new property, it is important to know that sellers are not required to enter into the exchange. However, most people will agree to your terms because they will have their capital gains paid for, which leaves them with the appreciation and the profit from selling their residence.
Conclusion
You cannot go wrong using a 1031 tax-deferred exchange because of having the advantage of several favorable benefits when using this method of real estate transaction. If you plan to exchange your primary residence or invest in another property and wonder if you should opt for a 1031 tax-deferred exchange, you must consult with your tax adviser first.
