Here’s the good news: The real estate your about-to-retire client owns has increased in value significantly since they bought it. The not-as-good news: If they were to sell that property, they’d probably face a sizable tax bill on the proceeds of that sale. That could reduce the value of the asset just when they’re focused on preservation or harvesting.
The much better news: With certain strategies, it’s possible to minimize that tax bill, or even reduce it to zero. One approach worth considering is a 1031 exchange, which allows a real estate investor to defer taxes on the sale of a property if they use the proceeds to purchase another like-kind property of equal or greater value.
Rob Johnson, head of wealth management for Realized, suggests thinking of a 1031 exchange as a tool to keep more of an investor’s real estate wealth working for them. “It’s a tax-deferred exchange, so you’re not subjecting that valuation to taxes,” he says. “The goal is to maintain more of the capital to continue seeking growth in the asset’s value.”
Making sure your clients understand how 1031 exchanges work—and whether they might benefit from them—can give them more tools to make informed decisions about their financial future.