Advantages of a 1031 Tax Exchange

The main advantage of a 1031 Exchange is the ability of a taxpayer to sell income, investment or business property and replace with like-kind property without having to pay federal income taxes on the transaction.

 

There are many ways to benefit from a 1031 Exchange. Below are just a few of the advantages to this powerful investment strategy:

 

Tax Savings: Federal and State taxes combined can be as high as 28 percent of the gain on an investment property. 1031 Exchanges allow investors to defer capital gains taxes when property is replaced with like-kind property within a specific amount of time.

 

Leverage: With the funds saved by deferring capital gains and other taxes on the sale of one property, investors have increased funds available for the purchase of a larger and potentially more profitable piece of property.

 

Diversification: Investors can expand the number or types of properties in their portfolio.

Consolidation: Investors can exchange several smaller properties and purchase one larger property to maximize ownership benefits and reduce management responsibilities.

 

Cash Flow: Investors can increase cash flow by exchanging out of a property that is producing little or no income, such as land, and purchase income-producing property such as a retail shopping center.

Management Relief: Investors who no longer want to manage high-maintenance properties can reinvest in properties requiring little or no management.

Increase Depreciation: Investors can exchange from a non-depreciable property (such as raw land) to a property that can be depreciated.

Estate Planning: Investors may continue to replace properties through consecutive 1031 exchanges, preserving profits and avoiding capital gain tax until death, at which time the gain may escape income taxation because of the stepped-up basis that the taxpayer's heirs may obtain in the property.

By deferring the tax, investors have more money available to invest in another property. In effect, investors receive an interest-free loan from the federal government, in the amount they would have paid in taxes. Any gain from depreciation recapture is postponed. Investors can acquire and dispose of properties to reallocate their investment portfolio without paying tax on any gain.