Subject: Why You Should Sell Your Investment Property Now!
If you’ve held onto your investment property for several years, you might feel that sticking with it is the best move. After all, it’s appreciating, and rents are rising. But there’s a strategy that savvy investors use to keep their portfolios fresh, maximize tax benefits, and increase cash flow over time: selling and exchanging properties every 10 years or so. Let’s explore why you might want to consider it, too.
The 1031 Exchange Advantage
A 1031 exchange allows you to defer capital gains taxes when you sell an investment property, as long as you reinvest the proceeds in a new, like-kind property. Instead of paying a tax hit on the gains, you can roll your equity into a new, often larger property and keep the gains working for you. It’s one of the most powerful tax strategies available to real estate investors, and it’s key to the “sell-and-exchange” approach.
By strategically swapping properties every decade, you’re not just building wealth—you’re actively preserving your gains without losing out to taxes. It’s a method that allows investors to grow their portfolios faster and with less tax exposure.
Depreciation: Use It or Lose It
One of the major benefits of owning an investment property is depreciation, which reduces your taxable rental income. When you first buy a property, depreciation is a big help: it can offset a significant portion of your rental income, lowering your tax bill. But here’s the catch: depreciation has a limit. For residential properties, the IRS allows a set depreciation period of 27.5 years.
Over time, as rents go up, your property’s cash flow increases, which is great news! But your depreciation credit remains the same, meaning it covers less and less of your rental income. Eventually, this increases your tax liability on the property’s income. Exchanging properties with a 1031 resets your depreciation clock, allowing you to start with a higher depreciation amount and reduce your taxable income once again.
Maximizing Returns by Upgrading
Another reason to consider selling and exchanging is the chance to “trade up.” When you’ve held onto a property for years, it’s likely increased in value. By selling and using the 1031 exchange, you can move your equity into a larger, more profitable property—one that offers better cash flow, more potential for appreciation, and a fresh start on depreciation.
For example, let’s say you started with a single-family rental. Over the years, you’ve built up equity and depreciation has been mostly used up. By selling and using a 1031 exchange, you can roll that equity into a multi-family property or commercial property that can potentially generate more income, diversify your portfolio, and give you greater returns.
A Strategic Cycle: Why Every 10 Years?
While every investor’s situation is different, a general guideline is to consider exchanging properties every 10 years or so. This timeframe allows you to take advantage of appreciation, accumulate some equity, and see an increase in rental income. By that point, your depreciation might not be covering as much of your income, and a fresh start with a new property can reset your tax advantages.
The sell-and-exchange approach helps you stay flexible, ready to adapt to market changes and maximize your returns without the tax penalties. It’s a proactive way to build and optimize a real estate portfolio that’s working as hard as possible for your financial goals.
Conclusion: Keep Your Portfolio Fresh and Profitable
Selling your investment property isn’t just about cashing out—it’s a strategy to keep your portfolio thriving. With the 1031 exchange, you can move from good investments to great ones, preserve your gains, and reset your depreciation to reduce taxes. Think of it as a cycle of upgrading, refreshing, and optimizing for the long term.
If you’ve held onto a property for years and feel it might be time for an upgrade, consider the 1031 exchange as a powerful tool to keep your wealth growing. Don’t let a stagnant portfolio or limited depreciation hold you back. Make your investments work for you—again and again!
Ready to Explore Your Options?
If you’re curious about how a 1031 exchange could benefit you, reach out to us today to discuss the possibilities. Let’s find out how you can maximize your returns, reduce your tax burden, and make your next move in real estate investing a profitable one.
