5 Reasons To Do A 1031 Tax-Deferred Exchange
Section 1031 tax deferred exchanges continue to increase in popularity as more investors nationwide discover the wide range of investment objectives that can be easily met through exchanging.
I. PRESERVATION OF EQUITY
A properly structured exchange provides real estate investors with the opportunity to defer 100% of both Federal and State capital gain taxes. This essentially equals an interest-free, no-term loan on taxes due until the property is sold for cash! Most often, the capital gain taxes are deferred indefinitely because many investors continue to exchange from one property to the next, dramatically increasing the value of their real estate investments with each exchange!
II. LEVERAGE
Many investors exchange from a property where they have a high equity position or one that is "free and clear" into a much more valuable property. A larger property produces more cash flow and provides greater depreciation benefits, which therefore increase an investor's return on their investment.
III. DIVERSIFICATION
Exchangers have a number of opportunities for diversification through exchanges. One option is to diversify into another geographic region such as exchanging of one apartment building in Denver, Colorado for two additional apartments – one in Los Angeles, California and the other in Dallas, Texas. Another diversification alternative is acquiring a different property type such as exchanging from several residential units to a small retail strip center.
IV. MANAGEMENT RELIEF
Many investors accumulate several single family rentals over the years. The on-going maintenance and management of what can be a far-reaching group of properties can be lessened by exchanging these properties for one property better suited to on-site maintenance and management. Exchanging into a single apartment complex with a resident manager is a good example of this strategy.
V. ESTATE PLANNING
Often a number of family members inherit one large property and disagree about what they want to do with it. Some want to continue holding the investment and some desire to sell it immediately for cash. By exchanging from one large property into several smaller properties, an investor can designate that, after their death, each heir will receive a different property which they can either hold or sell. Call the knowledgeable exchange professionals at Asset Preservation for a complimentary consultation regarding your specific investment objectives.
"AN OVERVIEW OF SEVERAL REQUIREMENTS
FOR TAX DEFERRAL"
WHAT IS IRC SECTION 1031?
Section 1031 of the Internal Revenue Code allows an owner of investment property to exchange property and defer paying federal and state capital gain taxes (15%+ applicable state taxes) if they purchase a like-kind property following the rules and regulations of the Internal Revenue Code. This allows investors to use all of their proceeds from their sale to leverage into more valuable real estate, increase cash flow, diversify into other properties, reduce management or consolidate into one property.
WHAT IS LIKE-KIND PROPERTY?
There is some confusion regarding what type of property qualifies for a §1031 tax deferred exchange. The Internal Revenue Code Section 1031 states that “no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.” Like-Kind property can include, but is not limited to, any of the following, provided it is held for investment:
• Single Family Rental
• Duplex
• Apartment
• Commercial Property
• Raw Land
For example, a single family rental can be exchanged for raw land, or apartments or a commercial building. In addition, properties can be exchanged anywhere within the United States.
DOES AN EXCHANGE NEED TO BE SIMULTANEOUS?
No, contrary to what most owners envision, a §1031 tax deferred exchange is rarely a two-party swap. Most exchanges are delayed exchanges, whereby the Exchanger has 180 days between the sale of the relinquished property and the closing of their replacement property. They must identify the potential replacement property(s) within 45 days from closing on their relinquished property.
WHEN IS A §1031 EXCHANGE APPLICABLE?
It is applicable whenever a property owner intends to SELL any property that is not their primary residence (and falls under the definition of like-kind) and plans to BUY another like-kind property within 180 calendar days following the closing of their relinquished property. Paramount to any exchange is a competent and experienced Intermediary. Asset Preservation is the entity which structures, consults, guides and documents the exchange transaction from beginning to end.
*All information provided by:
Asset Preservation, Inc.
National Headquarters: 800-282-1031
Eastern Regional Office: 866-394-1031
info@apiexchange.com
I have been a real estate agent in Boston MA and the surrounding areas for over 5 years. My knowledge of the market, attention to detail, unique style of negotiating sets me apart from other agents. Please feel free to call me directly at 617-233-4530 or simply fill out the form below and I will get right back to you.
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