If you’re looking for a way to maximize your returns, defer taxes, and grow your portfolio faster, learning how to make money with a 1031 exchange is essential. A 1031 exchange is a powerful tax-deferral strategy that allows real estate investors to sell one investment property and reinvest the proceeds into another "like-kind" property—without paying capital gains taxes at the time of sale.
In this article, we’ll break down how to make money with a 1031 exchange, the benefits of using this strategy, and how the DeRosa Group can guide you through the process to achieve financial success.
What is a 1031 Exchange?
A 1031 exchange, named after Section 1031 of the Internal Revenue Code, allows investors to defer capital gains taxes when selling an investment property if they reinvest the proceeds into a similar or "like-kind" property. Instead of paying taxes on your gains upfront, you can roll your profits into a new property, preserving more capital to reinvest and grow your portfolio.
But how can you leverage this tax strategy to boost your real estate returns? Let’s explore how to make money with a 1031 exchange step-by-step.
How to Make Money with a 1031 Exchange: Step-by-Step Guide
Here’s a step-by-step guide on how to make money with a 1031 exchange and why it’s a smart move for real estate investors:
1. Increase Your Purchasing Power
When you sell a property for a profit, a significant portion of your gains can be lost to capital gains taxes—up to 20% at the federal level, plus any state taxes. However, by using a 1031 exchange, you can defer these taxes and reinvest the full amount of your gains into a new property.
This increased purchasing power allows you to move up to larger or more profitable properties, accelerating your portfolio growth. For example, if you sell a property for $1 million and have $200,000 in capital gains, a 1031 exchange lets you reinvest the full $1 million rather than just $800,000. This extra capital can generate more cash flow, appreciation, and equity over time.
2. Generate Higher Cash Flow
One of the key ways to understand how to make money with a 1031 exchange is to focus on upgrading to properties that offer stronger cash flow. By exchanging a lower-income property for a higher-income one, you can increase your monthly passive income. For instance, if you own a single-family rental generating $2,000 in monthly rent, you could exchange it for a multifamily property with multiple units, potentially bringing in $8,000 a month.
This strategy not only increases your cash flow but also improves your overall return on investment (ROI), which is crucial for building wealth in real estate.
3. Diversify Your Real Estate Portfolio
A great way to make money with a 1031 exchange is through diversification. If your portfolio is heavily concentrated in one property type or market, consider using a 1031 exchange to diversify into different asset classes or geographic locations. For example:
Move from a single-family home to a multifamily property.
Exchange a multifamily building for a commercial or mixed-use property.
Shift from properties in one region to those in another, potentially more lucrative market.
By diversifying your portfolio, you reduce risk and open up new avenues for income and appreciation, which is a smart approach to how to make money with a 1031 exchange.
4. Leverage Value-Add Opportunities
Another strategy to increase returns is by targeting value-add properties with your 1031 exchange. Value-add properties require improvements, renovations, or management changes to boost income and property value. By acquiring these properties, you can significantly enhance cash flow and appreciation potential, driving higher returns on your investment.
For example, if you sell a stabilized property with limited upside and exchange into a value-add multifamily property, you can make strategic upgrades that allow you to increase rents, reduce expenses, and ultimately boost the property’s net operating income (NOI). This is one of the most effective strategies for how to make money with a 1031 exchange.
5. Defer Taxes Indefinitely
One of the most powerful aspects of the 1031 exchange is the ability to defer capital gains taxes indefinitely. You can use 1031 exchanges repeatedly, rolling profits from one property to the next over the course of your real estate career. As a result, you can build significant wealth without being hampered by taxes.
This strategy—often called “swap ‘til you drop”—allows you to continue growing your portfolio without triggering taxable events. When you pass away, your heirs can inherit the property with a step-up in basis, potentially eliminating the deferred taxes altogether.
Why Work with DeRosa Group to Make Money with a 1031 Exchange?
While understanding how to make money with a 1031 exchange is essential, navigating the process can be complex. The DeRosa Group, led by seasoned investors like Matt Faircloth, is a trusted expert in 1031 exchanges.
Here’s how the DeRosa Group can help you maximize your returns:
1. Expert Guidance and Support
The DeRosa Group has years of experience guiding investors through successful 1031 exchanges. From identifying potential replacement properties to navigating the legal and tax requirements, the DeRosa team offers hands-on support every step of the way.
2. Access to High-Quality Deals
Finding the right replacement property is critical to making money with a 1031 exchange. DeRosa Group’s vast network of brokers, agents, and property managers ensures that you have access to high-quality properties that meet your investment criteria, whether you’re seeking value-add multifamily properties or stable cash-flowing assets.
3. Comprehensive Education Programs
DeRosa Group’s education programs, including the Accelerator and Accelerator+, provide the knowledge and tools you need to execute successful 1031 exchanges. These programs cover deal analysis, property management, and strategic planning, making it easier for you to understand how to make money with a 1031 exchange and grow your portfolio.
4. Tailored Strategies for Your Portfolio
The DeRosa Group understands that each investor’s goals are unique. Their team will work closely with you to develop a 1031 exchange strategy tailored to your financial objectives, ensuring that you not only defer taxes but also optimize cash flow, appreciation, and overall returns.
Final Thoughts on How to Make Money with a 1031 Exchange
Learning how to make money with a 1031 exchange is one of the most valuable skills a real estate investor can develop. By leveraging tax-deferred exchanges, you can increase your purchasing power, generate higher cash flow, diversify your portfolio, and maximize long-term wealth.
If you’re ready to take your real estate investing to the next level, consider partnering with the DeRosa Group. With their expertise, guidance, and access to high-quality deals, you can confidently navigate the 1031 exchange process and achieve your investment goals faster.
Ready to get started? Reach out to the DeRosa Group today to learn more about 1031 exchanges and how they can help you make money with this powerful tax-deferral strategy.
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