Building Wealth

Building Wealth

If you think that the only objective anyone ever has for investing is building wealth, then you are not old enough or have not accumulated enough assets to start trying to balance the potential growth with the acceptable risk. When you are 25 years old, you have a lifetime to make up for a high-risk investment that goes bad.

When you are 65, it would be hard to recover from that same bad investment. At a younger age, investors make financial decisions primarily based on growth and future
return, but retirement-minded investors focus on income flow and stability. Of the four main tools for selling real estate without paying taxes, only two will appeal to the investor who is aggressively trying to build wealth.

The first and easiest to understand is the tax-deferred 1031 exchange. By using a tax-deferred exchange, property investors are able to continually step up their real estate investments. You may start with a rental house that you trade up to a 4-unit building.

Then some years later you may decide to trade up to a 20-unit apartment, and so on. All of these transactions will be protected from capital gains taxes if properly done by using the provisions of section 1031 of the Internal Revenue Code (hence, the nickname “1031 exchange”). There are, of course, certain restrictions and formalities that must be followed, but for the most part, 1031 exchanges are very common in real estate transactions.

The second method, a private annuity trust, also offers the potential for building wealth. For this tool to be appropriate, however, the goals must be long term and calculated to provide a return in the future.

Placing a property into a private annuity trust removes the asset from the reach of the investor but allows the trust to invest the proceeds with a high degree of flexibility. The growth of wealth in this case is usually for retirement-oriented thinking, but the growth potential, when done properly, is hard to dispute.

The other two options, installment sales and charitable remainder trusts, are not really suitable for growthoriented investors because each locks in the proceeds from the sale, allowing little or no flexibility.