As an investor, you must be aware that single dollar that you have invested is compounding your wealth, and, in contrast, that every dollar not working for you represents a lost opportunity to increase your wealth. So, when it is time to make a sale on a piece of property, you have two choices. The 1st way in which you can cash in on a piece of property's appreciated value is to sell the property up front and recognize the profits as a gain. This means that you must pay capital gains taxes . Every time you had money over to the government you are losing money that could be put back into investment.

The second, more lucrative choice is to conduct a 1031 tax exchange. A great way to keep more of your investment funds working for you is to conduct a 1031 exchange instead of making an outright sale. A 1031 exchange has a non-recognition provision, which means that you do not have to pay the taxes immediately; as a matter of fact, you can defer the taxes indefinitely, while your funds are compounded by the extra income produced by investing your tax deferment.

By way of example, imagine that you own several small investment properties, like triplexes, whose values have increased during the time you have owned them. At this point, your first instinct might be to sell these properties up front and reap the benefits of your investments. But a wise investor with an eye to the future might choose to conduct a 1031 exchange and place the money gained from these properties towards buying another, larger property, which will, itself go on to appreciate in value over time and continue to compound your wealth. Best of all, the extra money available to you from your capital gains deferral will function to increase your capacity to leverage for further loans, building your potential profits.

1031 exchanges aren't just for land and buildings, either. It is possible to make a 1031 exchange on any real estate held for investment in your business or trade, in addition to some kinds of personal property, from cranes or backhoes to airplanes or classic cars. As a matter of fact, Section 1031 is particularly advantageous to those who have invested in antiques or collectibles like classic cars, in light higher capital gains tax liability on the sale of these items. You cannot, however, exchange stockor interest gained from a Real Estate Investment Trust.

Next time you are in the position to sell a piece of real estate or other property, take a moment to think of the future dividends you could gain were you to exchange. If you choose to perform a 1031 tax exchange instead of selling your property up front, you can maximize your profits and come out ahead .