1031 Possibilities

The 1031 is the name of the tax code in the United States that allows one to exchange an investment property for another like kind property and defer all taxes on capital gains and depreciation. It is performed by a lawyer and there are a few stipulations I will go into at another time.

This is one of the most lucrative aspects of investing in the United States. This regulation allows you to defer all capital gains (difference between purchase price and selling price) to the future sale of the property, or forever if passed down after death. This is how wealthy people build family fortunes!

For example, Nitzan and Fatimah buy an single family investment property for $100,000. After all their expenses, they make %10 profit or $12,000 per year. After a few years the property value goes up to $140,000. They want to make more money per year, but If they sold the investment they would have to pay taxes on the capital gains and depreciation they made on the property. Instead they decide to do a 1031 exchange which allows them to sell their property and defer all taxes on their $40,000 profit and purchase a expensive property that generates $20,000 per year in profit ……. Fast forward 40 years. Nitzan and Fatimah have done 10 1031 exchanges and have an investment property with a value of 2 million dollars. They have avoided paying over 1 million dollars in capital gains taxes and depreciation the entire time. If they sell it, they will be responsible to pay all back taxes and depreciation. If they keep the property when they pass away their sons Yossi and Jagger will inherit the property free and clear. All capital gains from the property have been wiped clean.