Are you fed up with paying taxes on your hard-earned real estate profit? Are excessive taxes preventing you from securing your financial freedom as a real estate investor? If so, you should read further to learn more about the 1031 Exchange update for 2022.
As a savvy real estate investor, you can use this little-known tax break to increase your wealth. Once you've mastered the 1031 Exchange, you'll see an increase in your purchasing power as you keep your money working for you and not filling the federal government's coffers.
First, you have to know what we mean when talking about a 1031 Exchange. In general, a 1031 Exchange is a tax provision that lets you sell an investment property, take those gains from the property, and reinvest those gains into another property without paying taxes.
When you sell real estate and earn gains, you have to pay tax. Appreciated property means more tax when you sell. The flip side of that is true too. If your property depreciates, you are subject to depreciation recapture taxes when you sell. Those taxes apply to you whether you claimed the depreciation deductions on your taxable income or not.
Either way, the federal government will try to extract their pound of flesh from your gains.
The beauty of the 1031 Exchange provision is that you get to defer the taxes on your gains. That means as a real estate investor you pay no taxes when you sell your property and exchange it for a new real estate investment. If you follow the rules, you may be able to defer the taxes indefinitely as you reinvest into bigger or better properties.
If you want to learn more about the finer details of the 1031 Exchange, we recommend that you read Understanding 1031 Exchanges And Asset Protection Entities.
When President Biden won the election, one of his campaign promises was to eliminate the 1031 Exchange because of the perception that it gave an unfair advantage to the ultra-wealthy.
The Biden administration had planned on either eliminating the 1031 Exchange program or modifying it somehow. One of the planned changes was the complete overhaul of the 1031 Exchange program, but that plan hasn't come to fruition.
The other plan included a $500,000 limit on the amount of money exchanged per year. That plan has also failed to earn widespread support.
One of the reasons the government failed to eliminate the 1031 Exchange program is that it is not in their best interest to kill it. Here's why.
If the government were to limit the 1031 Exchange successfully, it would mean less tax revenue in the long run. In the short term, the government would enjoy the taxes from the sale of the property.
However, a limit or drastic change to the 1031 Exchange would probably chill the real estate industry. That means that more people will hold onto property to avoid taxes. When people hold
onto their properties, all the ancillary sources of tax revenue dry up.
That means the contractors, cleaners, attorneys, real estate agents, and title companies do not participate in those deals. When you eliminate those people from transactions, you eliminate the taxes they would have paid. On balance, the federal government earns less in tax by removing or reducing the effectiveness of the 1031 Exchange benefit.
Fewer taxes and political gridlock have prevented any significant changes from the tax code yet. However, as a competent real estate investor, you should prepare for changes, just in case. That means you should look into all tools available to you right now and take advantage of them.
You might wonder if the 1031 Exchange is the right investment strategy for you. Answer that question by checking out Is a 1031 Investment Strategy Right For Me?
The 1031 Exchange update doesn't take away from the fact that it still might be the right vehicle for you to avoid paying capital gains taxes. Right now, there is talk in Washington D.C. about making policy changes, but nothing has emerged from those discussions yet.
That's not to say that nothing will happen, but a lack of support and institutional gridlock are keeping policy changes at bay. As an intelligent real estate investor, you should plan, but don't worry too much about things out of your control.
The best thing to do right now is to use all your tools. That means finding out which real estate investment strategy is suitable for your particular and unique circumstances.
Do you have a plan for your financial freedom? If not, let us show you how to secure your financial independence and build generational wealth to pass on to your family.
To learn more about this powerful tax savings strategy and others that you can use to keep more of your earnings, book a tax consultation by taking our tax quiz. The information you provide will enable us to have a productive discussion the first time that we speak.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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