Tax Deferral (Immediate & Indefinite)
In a properly executed 1031 Exchange, the capital gain taxes are deferred and transferred to the Replacement Property. Tax is not due until the taxpayer sells the Replacement Property without utilizing a 1031 Exchange. Since there is no limit to the number of exchanges a taxpayer can complete, it is possible to defer the payment of tax indefinitely.
Improvements of Return on Investment (ROI)
A taxpayer may wish to sell an underperforming asset and acquire an asset that offers a more attractive cash flow or appreciation potential. Additionally, a taxpayer may wish to trade a non-income producing asset, such as raw land, for an asset that produces positive cash-flow, such as a retail shopping center. A properly executed 1031 Exchange will allow the taxpayer to achieve such an objective.
Consolidation or Diversification
Taxpayers may accumulate multiple property holdings and eventually determine the need to consolidate these holdings into a few larger assets. Conversely, taxpayers may own only one substantial property, and desire to diversify their holdings across several different properties. A comprehensive exchange strategy can help taxpayers achieve these objectives.
Elimination of Active Management of the Investment
Many taxpayers own investment property that is management-intensive. These taxpayers may want to defer tax when selling their Relinquished Property, but do not want to acquire Replacement Property that requires substantial management commitment. Potential solutions for this dilemma include the purchase of Triple Net Lease (NNN) property or Tenant-in-Common (TIC) interests, in which the maintenance and repairs are not the responsibility of the taxpayer.
Potentially, the greatest benefit that comes from using a 1031 exchange is the ability of the taxpayer to preserve all of the equity in the Relinquished Property. The compounding effect of earning a continual return on all of the equity, instead of a portion of the equity, can result in a higher overall yield for the taxpayer over time. This preservation of equity via tax-free exchanging is a powerful wealth building tool.
Ricky Novak, president of Strategic 1031 Exchange Advisors will be speaking at the October 2, 2010, “How to Profit from Foreclosure and Other Real Estate Investments.” Make sure you buy your tickets now.
Visit Strategic 1031 Exchange Advisors online for more 1031 information.
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