As a real estate investor, you are aware that single dollar that you have working for you is compounding your wealth, and, conversely, that each and every dollar that isn't working for you can be considered a missed opportunity to further compound your funds. When the time comes to make a sale on a piece of property, you have 2 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 a capital gain. This means that you will have to pay capital gains taxes on the sale proceeds. Every time you had money over to the U.S. government in the form of taxes, you are losing money that could be put back into investment.

Your second, and often more lucrative choice is to make a 1031 tax exchange. A great way to keep more of your investment funds making you more money is to perform an exchange rather than making an outright sale. Section 1031 has a provision of non-recognition; this means you aren't obligated to pay the capital gains taxes immediately; as a matter of fact, your taxes are deferred indefinitely, while your wealth is compounded by the extra income produced by investing your tax deferment.

As an example, imagine you own several small investment properties, like duplexes, whose values have increased during the time you've owned them. At this point, your first inclination might be to sell these properties up front and reap the benefits of your investments. A wise investor, however, might decide to make an exchange and put the proceeds from the sale of these investment properties towards buying another property, which will, itself go on to appreciate in worth over time, meanwhile continuing to increase your wealth. Best of all, the extra money at your disposal as a result of deferring capital gains taxes will function to increase your capacity to leverage for greater loans, maximizing your potential profits.

1031 exchanges are not limited to buildings and land, either. It is possible to make a 1031 exchange on any type of real estate held for investment in a trade or business, and some types of personal property as well, from a backhoe or crane to an aircraft or collector car. Section 1031 is especially beneficial for those who have money in antiques or collectibles such as collector cars, because of the higher capital gains liability on the sale of these items. It is important to note, however, that you cannot make a 1031 exchange on shares of stock, bonds, or interest gained from a Real Estate Investment Trust.

Next time you are in the position to sell an appreciated piece of real estate or other type of investment, pause for a moment and think of the future profit you could gain if you were to conduct an exchange. If you decide an exchange instead of selling your property outright, you can compound your wealth over time and come out ahead in the end.