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! 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!
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 the investors’ return on their investment.
Exchangers have a number of opportunities for diversification through exchanges.
One option is to diversify into another geographic region, such as exchanging
out 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
Some investors accumulate several single family rentals over the years. The ongoing
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
Sometimes 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.
Pros and Cons of Selling vs Exchanging