1031 Tax Free Exchange

Many successful people who have achieved financial independence have derived considerable net worth from prudent real estate investments. A significant portion of these investors were very hands on over the years in the development and management of their investment properties.

Like most people, many real estate investors envision a retirement with ample sources of predictable income as well as a life free from the hassles of property management.

Real estate investors face a dilemma when it comes to turning their actively managed real estate investments into a passive retirement plan. Once they sell their real estate they will owe taxes on all of their realized gains. Since most real estate investors typically depreciate their properties for tax purposes, they may have little or no tax basis remaining. Secondly if they cash out and pay taxes it may be difficult to earn as much income with their after tax proceeds as their properties were generating

Fortunately, the IRS does allow real estate investors to exchange one investment property for another without triggering a taxable event. There are certain procedures which must be followed, specifically the owner of the old property must be the same as the owner of the replacement property. Also a qualified intermediary must hold the sales proceeds of the liquidated property and use those proceeds to close on the new property.

Finally if the investor is looking for passive income, swapping an actively managed property for another actively managed property doesn’t solve any problems for investors who are looking to retire. Therefore, the investor must find a property that can be managed passively. There are several large real estate companies that are currently offering turnkey 1031 exchange diversified passive real estate investments that may be attractive to those looking for tax efficiency and predictable passive retirement income.