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A Tax-Free Way to Trade Up to a Higher-Priced Rental Property Investment

Plenty of landlords start purchasing cheaper homes as a Troy MI rental property investment. While this makes an affordable investment, it restricts the rental income and most likely appeals to lesser quality tenants.  As principal and appreciation develop over time, it is wiser for the investor to trade up to a rental property of higher value. Many investors are hesitant due to the possible consequences regarding tax. But, you can do a “rollover purchase” TAX FREE with a 1031 Exchange. An investor may rollover financial earnings into a new Troy MI rental property investment without worrying about capital gains taxes.

Sample Scenario

For example, let’s assume you prepared a Troy MI rental property investment with a $100,000 rental home a few years ago having a 20% down payment. Let’s say that your principal is now $25,000 and the property gained $20,000 in value.  Without a 1031 Exchange, you would pay capital gains tax of around 15%-20% relying upon your income. You would surrender $3,000-$4,000 to the tax man if you sell the property and purchase a newer one. With a 1031 Exchange’s help, you can hold off the capital gains tax by reinvesting in a more valuable property that has greater revenue potential.

There are tough regulations that you must observe under a 1031 Exchange.  First, the property you are selling must have been used in a trade, or business, or for investment. (Fix and flip properties don’t usually qualify.) You’ll need to employ an Exchange Facilitator approved to manage these transaction types. After which, you’ll receive 45 days beginning from the selling time of your original investment to pinpoint potential replacement properties. You’ll also have 180 days for the replacement purchase to be complete. There are still more limitations that your Exchange Facilitator will clarify.

If you are planning to possibly upgrade your actual investment property type, then consider obtaining a 1031 Exchange. It may cause a huge impact in the price and quality of investment you can purchase.


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