Over 50% of Americans have money invested in stocks. However, some of the most lucrative investments occur outside of the stock market.
Investing in real estate or businesses is a great way to increase your net worth, but not everybody understands how to go about it. To clarify, there are certain steps you can take to reduce your tax obligations.
Let's explore 1031 exchanges vs. opportunity investment.
1031 Exchange Defined
A 1031 exchange allows investors to allocate proceeds from the sale of one property to another property. The new property must be of equal or greater value than the old property. The investor must follow strict rules and timelines to qualify for the tax deferral. It must also be an “arm's length transaction." This means the investor cannot purchase from a family member or associated entity.
1031 Exchange Benefits
The primary benefit of a 1031 exchange is that it allows an investor to reinvest the full amount of the sale proceeds rather than paying taxes on the gain. This means that the investor can use all of their money to purchase a new or improved property rather than giving some of it up in taxes.
Note that the investor is simply deferring taxes. They still benefit from appreciation on the new property without having to pay additional taxes until it’s sold again.
An opportunity investment is a type of real estate transaction that involves investing in low-cost, distressed properties with the intention of rehabilitating and reselling them at a profit. The investor pays taxes on the initial purchase price, but they don’t have to pay any capital gains taxes until they resell the property.
Doing so gives them more time to invest in other properties and build their wealth.
Opportunity Investment Benefits
Opportunity investments offer a few advantages over traditional real estate investing. First, the investor is buying a property that is likely to appreciate in value after they rehabilitate it. This allows them to benefit from any appreciation without having to pay taxes until they resell the property. Opportunity investments often require less capital than other types of real estate investments.
This allows the investor to spread their money out and diversify their portfolio. Finally, opportunity investments often come with high potential returns with relatively low risk.
1031 Exchanges Vs. Opportunity Investment
The best decision for you will depend on your individual circumstances and goals.
1031 exchanges allow investors to defer taxes on the sale of a property, while opportunity investments let them benefit from appreciation without paying taxes until they resell.
In both cases, it’s important that you consult with an experienced professional before making your decision.
Get Started Today
Understanding 1031 exchanges vs. opportunity investment may seem complicated at first. It's much more straightforward than most people believe, though. Keep the above information in mind so that you can make the most of the opportunities that come your way. This will help ensure that you reach your financial goals and avoid complications in the future.
Looking for more information about what we can do? Get in touch with our team of qualified financial professionals to get started on the right track.