Are Like-Kind Exchanges Only for the Real Estate Elite?

NEW YORK, March 1, 2022 (Newswire.com) - iQuanti: Any savvy real estate investor has a plan to level up their portfolio in the future. Whether investors plan to acquire more properties or sell up into a property with more units, growth is one of the keys to investing success. The 1031 like-kind exchange has proven to be a huge help for real estate investors that want to upgrade their properties while deferring capital gains. 

But are these rule-bound transactions available to the everyday investor, or is a like-kind exchange only for the real estate elite? Here's how like-kind exchanges work and how they can benefit the everyday real estate investor.

What is a Like-Kind Exchange?

A 1031 like-kind exchange allows real estate investors to defer capital gains as they trade an existing property for another. The transaction, which takes place over a maximum of 180 days, involves a qualified third-party intermediary to oversee the transaction and handle the money exchange. The intermediary also helps to ensure the transactions follow the IRS code, so an investor doesn't risk losing tax-deferred status on the exchange. 

1031 Exchanges by the Numbers

Between 2016 and 2019, 84% of 1031 exchanges were completed by small investors in a sole proprietorship or S corp, according to a 2020 study published by the National Association of REALTORS®. The survey also revealed that half (52%) of properties sold in a 1031 were residential properties. That means most like-kind exchanges are not happening with the real estate elite but with small investors selling and buying residential properties. 

How Does a 1031 Exchange Benefit the Everyday Real Estate Investor

There are several benefits of a like-kind exchange for real estate investors operating on a smaller scale, including: 

• Allows access to higher-priced properties: The 1031 exchange enables investors to upgrade into more valuable properties that they may not have been able to access without the tax savings from deferred capital gains. 
• Offers potential for higher income from properties: As investors upgrade their properties, earning potential is higher. Plus, investors could leverage a like-kind exchange to move from one higher-priced property to a portfolio of properties in a lower-priced area, thereby diversifying their income streams. 
• Creates jobs in the community: By deferring a hefty tax payment, investors may be able to afford to upgrade their new properties. A team of local workers is required for any remodel, which may include painters, contractors, plumbers, electricians, and more. Creating jobs is a side effect of a 1031 exchange that can help support communities. 
• Improves quality of life for renters: The tax-deferred savings of a like-kind exchange enable investors to put money back into their properties. As a result, the tenants living in those properties have a nicer space and improved quality of life. 

The Bottom Line

A like-kind exchange can enable everyday real estate investors to upgrade their properties, create jobs in their communities, and earn more income from their investments. If you're a real estate investor looking to perform a like-kind exchange, your realtor can be a wealth of information to guide you in the right direction to make the most of your investments. 

Source: iQuanti, Inc.