The commercial real estate sector marked its ninth year of positive growth in 2018 as valuations and rents continue to soar across all asset classes. That’s one of the many reasons that make the sector a choice investment vehicle for many vehicles.
While pundits expect the upswing to carry over into the future, it takes smarts and a sound strategy to increase the value of your assets and RIO. Tucking on a 1031 exchange property into your portfolio might just be the secret ingredient you need to grow your wealth.
The federal government sanctioned program comes with a heap of benefits to help you grow your portfolio.
But what is a property exchange?
Recognizing that commercial real estate investment is a capital-intensive investment, the government moves in to save the day. Under section 1031 of the Tax Code, investors in the sector get a tax break or a tax deferral benefit.
You get a chance to defer on capital gains tax indefinitely as long as you keep investing in the industry. Under this provision, you can swap one commercial property for another commercial property. Knowing the government, such generosity comes with conditions attached.
Luckily, the requirements here are not as stringent, and you can meet them with relative ease. You have six months to conclude a property exchange, and you can only swap for a property of equal or higher value.
The replacement property or properties should not be more than twice the value of your current asset. On the upside, there are no restrictions to the type or location of the replacement property.
How does a property swap help you?
For starters, skipping the capital gains gives you deeper pockets when going after your replacement property. That helps to improve your financial strength in that you don’t need to take out huge loans to finance the purchase of higher value property.
In the commercial sector, bigger and better properties generate higher rental income. Additionally, you get to improve your investment portfolio, which is instrumental in lowering your risk exposure. As long as the total value of replacement property falls under the price guidelines, you can spread them across various sectors.
For instance, you can have a few rental houses, a block of apartments, a warehouse facility, and a farm. You can spread your real estate holdings across the country, enabling you to go after the most lucrative markets.
You can also dispose of properties in a non-performing market and escape the losses that are likely to follow. The same case applies to avoid underperforming asset classes.
With a little help from the government, you never have to miss out on lucrative deals in the commercial real estate sector. Under section 1031 of the tax code, the federal government lets investors in the cash-intensive sector defer capital gains when selling a property.
Following the stringent requirements enables you to grow an impressive real estate portfolio. You can take advantage of the free monies from the government and keep adding high-value properties to your holdings. Better yet, you get to do this without taking out huge expensive loans.