With the real estate market picking up, I thought it would be timely to discuss a vehicle that successful real estate investors use to increase their wealth and defer tax burdens. It's called a 1031 Exchange.

A 1031 Exchange can be summed up as a way to defer taxes on real estate by reinvesting proceeds from the sale of a property to purchase another property. Let's say that John Smith purchased a single-family residence as an investment property that he wanted to rehab and sell. After he completes the upgrades and remodel, he decides to put the property on the market and ends up selling it for a $50,000 profit. If John decides to walk away with the $50,000 and not purchase any more real estate, he'll be taxed on the profit he made on the sale of his property as if it were income to him. Instead of walking away with $50,000, he'll likely walk away with only $30,000 because he will be taxed.

However, John Smith has another option. If he decides to take the $50,000 profit from the 1stproperty and use it towards the purchase of another property, he will not have to pay any taxes and saves himself $20,000. He would do a 1031 Exchange which is basically a way to transfer property for "like" or similar property and defer any tax burdens. There are guidelines for this type of transaction, but typically someone has up to 6 months to purchase another property with their profit in order to avoid being taxed.

If you're looking to increase your wealth, make sure you're taking advantage of this option.