1031 Exchanges Help Real Estate Investors and Companies Go “Green”—and Save a Little Green in the Process
Accruit is seeing more and more investors and companies leveraging the benefits of 1031 exchange to go “green” by investing in energy efficient buildings and renewable energy like solar arrays and wind farms. Beyond the purely environmental benefits, companies and investors are realizing the added investment value and cost savings of these green investments. This includes lower ongoing energy costs, higher resale values, stable income production and upfront and ongoing tax incentives.
Our customers are accomplishing the alignment of their investment and environmental objectives in a multitude of ways:
- Investors or businesses may currently own a property where they don’t have the capital or desire to retrofit it to be more energy efficient, but also have a large gain if they sold and then moved to a new location. Using a 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 for productive use in a trade or business or for investment." 1031 Exchange the owner of the building can exchange out of the energy inefficient property and into a ‘greener’ building, deferring taxes on their gains in their original property.
- Similar to the previous scenario, but the investor can’t find an energy efficient new building to purchase. Many real estate investors and companies are unaware that they can leverage a 1031 exchange to purchase and then make substantial improvements to that property over a 180-day period. In this case, the investor can leverage an improvement exchange to sell their current property and use the proceeds to purchase and then improve the new property to become more energy efficient.
- An investor wishes to exchange into or out of a solar or wind farm. The value of solar arrays or wind farms is largely a function of the value of the lease, i.e. the rent or royalties, term, and strength of the lessee. Oftentimes the sale prices can be considerable, which in turn, may cause a significant tax event to the seller . In many instances, the availability of a 1031 exchange can be the key to enabling a sale to take place by minimizing the tax burden to the seller
Everyone agrees that going green is good for the environment, but the cost of doing so can take a bite out of the bottom line. There are numerous upfront and ongoing tax benefits to encourage investment, but that may not be enough to overcome the upfront negative tax implications of selling property at significant gain.
This isn't the case if the power of the 1031 exchange is utilized. An exchange will allow real estate investors and companies to apply capital to a green investment that they would normally have to pay to the IRS. This is called leverage, and it is one of the great benefits of the 1031 exchange. Having this money available to purchase or improve new property can also negate the need for a lender.
So go ahead - go green and save some green at the same time.
For additional reading on green energy, real estate, and 1031 exchange, see our recent article about windfarms and turbines.