When it comes to investing your money, there are few opportunities that offer you the same benefits that investing in real estate is able to offer. This is because not only do real estate investments come with far less risk than many other traditional investment opportunities, but they also provide you with the chance to create passive income and build wealth. One of the ways in which you can build wealth by investing in real estate is through the use of rental property 1031 tax exchanges. In this article, you'll learn more about how these tax exchanges work and how you can use them to help build your wealth.

What Are Rental Property 1031 Tax Exchanges And How Do They Work?

Rental property 1031 tax exchanges are a type of tax deferment offered by the federal government which allows individuals to defer capital gain taxes when selling a rental property. However, they must use the money earned from that sale to purchase another rental property within a certain time frame. While these tax exchanges do not eliminate the tax that is owed, they do allow investors to delay the need to pay these taxes for a virtually unlimited amount of time assuming they continue to invest their money.

How Can You Use 1031 Tax Exchanges To Build Wealth?

Since real estate tends to appreciate in value over the course of time, individuals who choose to invest in rental properties will typically make a profit when choosing to sell one of their rental properties. Under normal circumstances, this profit would be decreased by the need to pay capital gain and income taxes. However, when using 1031 tax exchanges, you are able to defer this tax liability which therefore allows you to reinvest the full amount of your profit into a more valuable rental property. Not only does this give you the ability to increase your overall wealth at a faster rate, but it also can result in significantly more income for you each month as you can expect to earn higher rent each month on your new higher-end properties. 

Putting This Knowledge To Work For You

By now you should have a pretty clear idea of what a 1031 tax exchange is and how you can use these exchanges to help you build your wealth. The next step is to put this knowledge to work for you by contacting a real estate lawyer or professional tax service. These professionals will be able to help you navigate all the rules regarding rental property 1031 tax exchanges and ultimately help you to complete one or more of these exchanges.

Contact a tax service for more information about rental property 1031 tax exchange programs.