Financial Leverage & Flexibility
When the tax liability in a transaction is deferred, the taxpayer has access to more capital for the acquisition of the replacement property. Thus, deferring taxes with a Section 1031 exchange provides the power of financial leverage. For any given property, an investor who can allocate all of the equity from that property has more purchasing power than an investor who loses a portion of his equity to taxes. This added purchasing power translates into the potential to increase appreciation, cash flow, and tax benefits as well.
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The 1031 Exchange – Strategic Flexibility
There are many investment strategies the taxpayer can employ utilizing Section 1031. Here are a few examples:
- Consolidate many properties into one for ease of management
- Relocate properties geographically to take advantage of trends
- Change property types (real estate exchanges only)
- Improve investment performance
- Adapt to changes in needs and abilities, and other life transitions
- Replace older properties with newer ones
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