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As an investor, you are aware that every single dollar that you have working for you is compounding your wealth, and, conversely, each and every dollar that isn't working for you can be considered a missed chance to compound your profits. So, when it comes time to put your property up for sale, you have 2 choices. The 1st way in which you can cash in on your property's appreciated value is to make a outright sale and recognize a gain. Accepting this liability means you'll have to pay capital gains taxes on the sale proceeds. Whenever you pay money to the U.S. government you are losing potential profits. The second, more profitable choice is to conduct a 1031 exchange. A 1031 is a great way to keep more of your investment funds working for you. A 1031 exchange has a non-recognition provision, meaning you do not have to pay the capital gains 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. As an example, let's say you are the owner of several small investment properties, such as triplexes, whose values have appreciated over time. At this juncture, your inclination might be to make an outright sale and reap the benefits of your investments. A wise investor, however, might choose to conduct a 1031 exchange and put the proceeds from the sale of these smaller investment properties towards buying another investment property, which will, itself proceed to appreciate in worth over time, meanwhile continuing to increase your wealth. Additionally, the money at your disposal from your tax deferral will work to increase your capacity to leverage for further loans, maximizing your potential profits. 1031 exchanges aren't just for buildings and land, either. It is possible to make a 1031 exchange on any real estate you are holding for investment in a trade or business, and some kinds of personal property as well, from cranes or backhoes to airplanes or classic cars. 1031 exchanges are particularly beneficial to those who have invested their funds in antiques or collectibles such as classic cars, in light higher capital gains liability on the sale of these items. You cannot, however, make a 1031 exchange on things like shares of stock, bonds, or interest in an REIT. Next time you are planning a sale on a piece of real estate or other type of property, pause for a moment to consider the dividends you could gain if you were to conduct an exchange instead. If you choose to perform an exchange instead of selling up front, you can maximize your wealth and come out on top .
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