Why should one
consider doing a 1031 tax-deferred exchange?
You may have some non-income producing real estate investments,
such as raw land. You could exchange this property for another asset that would
not only give you cash flow, but also get you income tax deductions such as
depreciation, which you did not have with your raw land.
You may have been holding properties long after their appreciation has topped
out. You can start rebuilding your equity by disposing of those investments
and acquiring new ones.
You may have management-intense rental properties and would prefer
to transfer your equity to ease-of-ownership single tenant properties (coupon
clippers) such as Walgreen Drug Stores, Wal-Mart, Post Offices, Circuit City,
Office Depot, etc.
When selling real estate, if you sell and reinvest, you will pay income taxes
on the realized gain. However, if you call it an exchange, you will
This means that more money is available for acquiring your next
investment. It can be regarded as a free loan from the government!
With proper estate planning you can keep exchanging properties throughout your
lifetime. Neither you nor your heirs will ever pay income taxes on the gains.
By doing a tax-deferred exchange, you conserve your equity by not having to
pay taxes on your net profits.
You may have owned a leveraged property long enough to have accumulated
considerable equity. You now have an opportunity to exchange into a larger asset,
and reposition your equity to your benefit or that of your heirs, without paying
taxes.
We highly recommend using qualified professionals that have experience in 1031
tax-deferred exchanges to guide you and ensure your compliance with government
regulations.
DISADVANTAGES
There are only two possible disadvantages worth noting. One of
them being that you will have a slightly lower depreciation schedule when you
acquire your new properties. This is because the IRS will look at your new tax
basis as being the same as your previous one, less your deferred gain.
The other disadvantage is that losses on your income tax return cannot be deducted
if you exchange property rather than sell it. If you want to take a loss, simply
call it a sale, not an exchange
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