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What is a 1031 Exchange?

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Done properly, 1031 exchange is a legally powerful strategy to build wealth with investment properties.  It has enabled many investors to improve their net worth over a 10-year to 20-year time frame. 

The basic concept underlying a 1031 exchange is to defer the taxes that otherwise would be due upon the sale of an investment property by reinvesting the entire proceeds from the sale into another "like kind" qualified real estate and leveraging that down payment by taking out a new similar-size or larger loan.  An investor can sell property in one location and move the proceeds to purchase real estate in a more desirable location.  Non-cash flow property such as undeveloped land can also be converted into income-producing property.  Or vice versa--if the investor just wants to park the proceeds in land. 

Hence, the amount of tax that otherwise would have to be paid after the sale of an investment property is reinvested to take advantage of two mathematical concepts: compounding and leveraging.  This process can result in a very substantial accumulation of wealth over time, provided that each successive exchange of properties results in positive capital gains.  There are strict rules and time lines that must be followed.  Not all REALTORS® know how to do a 1031 exchange. 

Elena Yu has done 1031 exchange. Give her a call (858-405-5175) or send her an e-mail (ElenaY@WeichertElite.com) if you are interested in starting, or continuing with, this wealth-building process.