In an article for Real Wealth Network by Benjamin Smith, “How to Do a 1031 Exchange: Rules and Definitions for Investors 2018,” Smith briefly outlinesa 1031 exchange and then provides detail about different aspects of the process. In the first FAQ section, Smith explains that a 1031 exchange can be an excellent avenue for an investor to defer the payment of capital gains taxes for at the time of the transaction. This creates an opportunity for reallocation of equity/capital in one investment without having the burden of the incurring the tax liability on the new property. A 1031 exchange uses the income from a like-kind property to invest in another one. This can be a great option for investors presented with an opportunity that can potentially increase their cash flow, per dollar, overall. In the third FAQ Smith explains how the investor will eventually have to pay taxes. However, in the time-frame that the taxes are deferred, the investor can trade properties more conveniently because of the delay for the taxes incurred. Smith goes on to mention that it is very important the new loan amount is equal to or greater than the replacement property. Lastly, one of Smiths key takeaways is that anyone can increase their options for passive income, from real estate, with education on creative strategies, like the 1031 exchange. That being said, a small mistake can lead to a big problem, so Smith suggests that most people use a professional’s opinion to mitigate that possibility, or exercise thorough due diligence.
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