A 1031 exchange allows the seller of a business use or investment property to defer the gain as long as a like-kind business use or investment property is acquired. This Friday Free for All, we will look beyond the deferred gain and review the many benefits of a 1031 exchange.
While the immediate tax deferral is the top goal of most taxpayers, an exchange can help you reach many short and long-term investment goals. Some of these often overlooked benefits include:
- The time value of the tax-deferral. Rather than paying taxes when you sell, you can put that money into another piece of real estate that better suits your needs and where money will continue to appreciate. A 1031 exchange helps you build your real estate portfolio with pre-tax dollars.
- The opportunity to acquire new property with greater return on investment. Whether is it is more income or greater potential appreciation, a 1031 exchange helps you move into a property that makes more sense for you. This can be accomplished with more rental units, higher rental rates or a better location that is easier to rent.
- Consolidation of your real estate portfolio from several large properties into one more profitable property.
- Whether it is the location or asset class of the property, diversification of your real estate assets.
- Acquire a property that is easier to manage, such as the more passive triple net lease (NNN) or Delaware Statutory Trust (DST).
- The relocation or expansion of your business anywhere in the US; through the acquisition of new properties and/or leasehold interests of 30 years or more, including options.
- Excellent exit strategy for business owners who own business property. This property can be exchanged for other income producing replacement property.
- The possibility to convert your replacement property into a personal use property, such as a primary residence or vacation; after satisfying the qualified use requirements.
- The deferred gain does not count as income for the current tax year so the proceeds will not negatively increase your income tax rate and capital gain tax rate. It could also help keep you out of the 3.8% Unearned Net Investment Tax or the Alternative Minimum Tax. The current maximum income rate is as high as 37% and the capital gain tax rate is as high as 20% depending on your income.
- Estate preservation. For individual taxpayers, all deferred gain will be forgiven at the time of death and your heirs can inherit all of your assets with a stepped up basis. The basis is stepped up to the value at the time of death and can be immediately sold with no federal tax consequences. Currently, the first $11,000,000 of your estate can be passed to your heirs and excluded from federal estate taxes.
The benefits of 1031 exchanges are numerous. The more you know about them, the easier it is to maximize their benefits. Our Exchange Team is here to help you learn about the power of 1031 and discuss your particular objectives.
