Beyond Deferring Capital Gains Taxes: Advantages of a 1031 Exchange
Savvy investors over the years have leveraged the benefits of the 1031 Exchange for reasons that far exceed its primary purpose of deferring capital gains taxes. “Like-Kind” exchanges are becoming more popular not only as a proven method to mitigate tax liability, but also as a valuable tool for investors to meet a wider range of strategic goals. What follows are just a few examples of how 1031 Exchanges have been utilized:
- Defer tax on large gains and purchase now while rates are still historically low
- Exchange into markets that haven’t experienced large amounts of appreciation
- Exchange out of management intensive properties into more passive management options
- Exchange into different spaces that still have reasonably attractive cap rates
- Exchange out of non-income producing assets (i.e. vacant land) into income producing assets resulting in additional cash flow
- Exchange into more vibrant investment properties to generate improved cash flow
- Exchange out of property that has been fully depreciated and obtain a new depreciable basis by exchanging into a larger asset
- Exchange into property in other states to accommodate retirement options
- Relocate investment property to accomplish ease of management
- Exchange out of multiple assets into a single property to consolidate holdings
- Exchange out of a single asset into many properties to diversify portfolio
- Exchange property from one state into another to take advantage of better performing markets
- Exchange into a vacation home property
- Buy property that your child can live in during college while renting out to other students
- Exchange into a rental property you ultimately wish to use as a primary residence at later date
- Unlock equity by exchanging into property with greater income and appreciation potential
- For estate planning to mitigate inheritance tax liability by leveraging “stepped up basis” provisions of the Tax Code
- Exchange into fractionalized ownership options to eliminate management and protect against failed exchange
Investors nationwide are discovering the wide range of opportunities available through the 1031 Exchange process that extend far beyond the Internal Revenue Code. As always, discuss your options with your legal and tax advisers first. How many ways can a 1031 Exchange help you meet your goals? We’re here to help.