One of the best ways to preserve equity made in real estate is through the tax deferred method of a 1031 exchange. Simply put, if a seller plans to reposition equity in another real estate asset, he can use a qualified intermediary to facilitate a 1031 exchange and “trade” one asset for another. In doing so, any tax liability on the profit of the sale is deferred until the replacement property is dispositioned.
As a real estate agent, I have helped several clients (including myself) preserve capital and improve their asset leverage in these types of exchanges.
Some examples my clients have done are:
* Exchange a condo earning $1200/mo rent for two 4-plexes earning over $5000/mo rent
* Exchange acreage earning $4000/yr on a farm lease to two condos earning over $25,000/yr in rents
* Exchange a vacant single family house for a cash flowing 12-unit apartment building
With the US real estate market searching for a bottom, now may be a good time for some sellers to reposition real estate holdings to take advantage of the next real estate cycle. Here are some examples of exchanges that might work depending on individual situations:
1) Take non or low income land (acreage) and convert to income generating property
2) Take several properties and convert to a single property
3) Take non appreciating property and convert to a higher appreciating property
4) Take a single property and convert to several properties
5) Take a property with high equity and convert to a more valuable property with a lower equity position
Austin has some great opportunities right now to assist in building a healthy real estate portfolio. Give me a call if you would like to talk about how a 1031 exchange might be a good strategy for you.
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