1031 Exchange Benefits Beyond Tax Deferral

Generally, real estate investors complete 1031 Exchanges to defer the capital gains tax on the disposition of their investment properties. However, there are many additional underlying reasons an investor might want to exchange one property for another. The motives often center around the standard risk/reward, cashflow, and appreciation scales.

Some of the typical non-tax motives to 1031 Exchange include:

• Exchange from fully depreciated property to a higher value property that can be depreciated, potentially lowering reportable net income.
   
• Exchange from property that cannot be refinanced. For example, moving from vacant land to improved property, which can support a new refinance loan, and will thereby give the client the ability to obtain cash after the acquisition of the Replacement Property.
   
• Exchange from non-income producing raw land to improved property to create a positive cashflow from the rental income.
   
• Exchange from a property with maximized or minimal cashflow, such as an apartment building, to a higher cashflow property, like a retail shopping center, to generate larger cashflow.
   
• Exchange from a stagnant or slowly appreciating property to a property in an area with faster appreciation.
   
• Exchange into a property or properties that may be easier to sell in the coming years.
   
• Exchange to meet location requirements. For example, the Exchanger moves to another state and wants to have their investment property nearby for management purposes.
   
• Exchange to fit the lifestyle of a client. For example, a retiree may exchange for a property requiring reduced management responsibility so they can do more traveling.
   
• Exchange from several smaller properties to one larger property or visa-versa.
   
• Exchange to a property the Exchanger can utilize for his or her own profession. For example, a doctor may exchange from a rental house to a medical building to use for his or her practice.
   
• Exchange from a partial interest in one property to a fee interest, 100% ownership, in another property.
   
• Exchange from a management intensive fee interest property to a professionally managed triple net leased property where the tenant is responsible for all of the maintenance.
   
• Exchange to diversify and minimize risk to real estate portfolio. For example, exchange from residential to commercial real estate or exchange into property located in other regions of the United States.

The above is just a short list of additional reasons, unrelated to taxes, that many look to utilize a 1031 Exchange. As you can see, deferring Capital Gain tax, although compelling, is not the only reason investors utilize 1031 Exchanges in their investment strategy.

The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.