There are a variety of benefits to 1031 exchanges, which allow investors to sell or relinquish property and acquire replacement property and gain significant tax advantages.
1031 EXCHANGES DEFER CAPITAL GAINS TAXES
Clearly, the primary benefit of a 1031 exchange is the ability to avoid hefty capital gains taxes on the sale of a business use or investment property. When property owners reinvest the money they earn from a sale into a new property, they can defer the tax liability incurred from the original sale. This means that investments can continue to grow tax deferred.
1031 EXCHANGES GIVE INVESTORS MORE MONEY TO REINVEST
Because of the tax deferment, investors have more capital to reinvest, which is even more valuable at times like the present when real estate prices are down. Currently, long-term capital gains are taxed at 15 percent, and that rate is expected to rise in near the future. The time is right to take advantage of this benefit and then wait until the tax rate is lowered to realize gains.
1031 EXCHANGES ALLOW FOR DEFERRED DEPRECIATION RECAPTURE
If investors don’t immediately need the depreciation deduction on a property, a 1031 will allow them to defer it to a time when they actually need to use it against taxable income.
1031 EXCHANGES COVER A WIDE RANGE OF PROPERTIES
The official language of the tax law is “like-kind,” but it’s important to keep in mind that in terms of 1031 exchanges, like-kind is a broad term. While investors do have to have the same intentions for use, meaning the property is being held as an investment, or used for a business, the actual properties involved don’t have to be similar. Investors can exchange a strip-mall ranch for undeveloped land, or an apartment building for a strip-mall ranch, or any combination that falls within the rules and guidelines of the law.
1031 EXCHANGES ALLOW INVESTORS TO DESIGNATE MULTIPLE REPLACEMENT PROPERTIES
It’s not always easy for an investor to line up a replacement property, but the IRS allows investors to name three potential properties, as long as one will eventually be closed on. There are other parameters that allow for even more properties to be designated if needed.
1031 REQUIRE A QUALIFIED INTERMEDIARY
This requirement protects investors by handling funds from the original sale through the exchange process. In the end, the exchange partner will deliver the money to the closing agent. Carefully considering the choice of a qualified intermediary means the investor will be in the hands of someone who knows the intricate details of the tax law, and has the experience and expertise necessary to review the process and catch any problems that may arise.