Unlike the stock market where many factors are out of your control (you can lose all your money overnight), investing in commercial real estate allows you to build wealth over time and offers many tax benefits. We have helped many clients with their building acquisitions and dispositions, all while guiding them on how they can optimize tax benefits that come along with their investment. While there are many tax benefits for investing in real estate, perhaps none of them are more valuable than the 1031 Exchange Program.
Since President Joe Biden has announced that he plans on eliminating the 1031 Exchange Program for investors whose annual income exceeds $400,000, those that are seeking to make commercial real estate investments in the future will be largely affected.
What is the 1031 Exchange Program: The 1031 Exchange Program allows you to defer your capital gain taxes when you swap one investment property for another. The IRS code section 1031 has many rules and limits that an investor needs to be aware of, but the 1031 Exchange Program has ultimately been considered a huge tax benefit for real estate investors as they grow their portfolios.
Why it matters: If the 1031 Exchange Program is eliminated, capital gains tax will nearly double for investors that are in the top tax bracket (39.7%). Investors who are worried about the large tax hike will think twice before selling their properties and the supply on the market will shrink. In addition, there will be little incentive for investors to put their proceeds towards larger real estate investments.
What we are advising: There is still a chance that the 1031 Exchange Program will not be eliminated, but if it is, you should be aware that real estate is an allowed investment inside retirement accounts and is an ideal option for tax deferment on real estate investments. Both IRA’s (Individual Retirement Accounts) and 401(k) plans allow any rental income to grow tax-deferred and can be re-invested. However, there are times when using a retirement account is not appropriate for making a real estate investment, and using cash will be more beneficial.
Key takeaway: While the 1031 Exchange Program hasn’t been eliminated by President Joe Biden yet, it is important to know your options when looking to make an investment in commercial real estate. At Wildmor Advisors, we are not experts in tax law, but we are experts in commercial real estate and we are here to help answer any questions you have on any current or future investments you plan to make.
