1031 Exchange Benefits Beyond Tax Deferral

Generally, real estate investors complete Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange s to defer the capital gains tax on the disposition of their investment properties. However, there are many additional underlying reasons an investor might want to exchange one property for another. The motives often center around the standard risk/reward, cashflow, and appreciation scales.

Some of the typical non-tax motives to Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange include:

• Exchange from fully depreciated property to a higher value property that can be depreciated, potentially lowering reportable net income.
   
• Exchange from property that cannot be refinanced. For example, moving from vacant land to improved property, which can support a new refinance loan, and will thereby give the client the ability to obtain cash after the acquisition of the Those certain items of real and/or personal property qualifying as “replacement property” within the meaning of Treasury Regulations Section 1.1031(k)‑1(a) and either: (a) received by the taxpayer within the designation period in accordance with Treasury Regulations Section 1.1031(k)‑1(c)(1) or (b) identified in a written designation notice signed by the taxpayer and hand delivered, mailed, telecopied or otherwise sent to the qualified intermediary before the end of the designation period in accordance with Treasury Regulations Sections 1.1031(k)‑1(b) and (c). The definition of “replacement property” shall not include property the identification of which has been revoked by the taxpayer in accordance with Treasury Regulations Section 1.1031(k)‑1(c)(6); (“New Asset”) Property or properties properly received by a taxpayer as part of a 1031 exchange. Replacement Property .
   
• Exchange from non-income producing raw land to improved property to create a positive cashflow from the rental income.
   
• Exchange from a property with maximized or minimal cashflow, such as an apartment building, to a higher cashflow property, like a retail shopping center, to generate larger cashflow.
   
• Exchange from a stagnant or slowly appreciating property to a property in an area with faster appreciation.
   
• Exchange into a property or properties that may be easier to sell in the coming years.
   
• Exchange to meet location requirements. For example, the (“Exchangor” or “Taxpayer”) Person intending to conduct a 1031 tax deferred exchange, who transfers a relinquished property and thereafter receives a replacement property. Exchanger moves to another state and wants to have their investment property nearby for management purposes.
   
• Exchange to fit the lifestyle of a client. For example, a retiree may exchange for a property requiring reduced management responsibility so they can do more traveling.
   
• Exchange from several smaller properties to one larger property or visa-versa.
   
• Exchange to a property the (“Exchangor” or “Taxpayer”) Person intending to conduct a 1031 tax deferred exchange, who transfers a relinquished property and thereafter receives a replacement property. Exchanger can utilize for his or her own profession. For example, a doctor may exchange from a rental house to a medical building to use for his or her practice.
   
• Exchange from a partial interest in one property to a fee interest, 100% ownership, in another property.
   
• Exchange from a management intensive fee interest property to a professionally managed triple net leased property where the tenant is responsible for all of the maintenance.
   
• Exchange to diversify and minimize risk to real estate portfolio. For example, exchange from residential to commercial real estate or exchange into property located in other regions of the United States.

The above is just a short list of additional reasons, unrelated to taxes, that many look to utilize a Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange . As you can see, deferring Capital Gain tax, although compelling, is not the only reason investors utilize Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange s in their investment strategy.

The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified A person acting to facilitate an exchange under section 1031 and the regulations. This person may not be the taxpayer or a disqualified person. Section 1.1031(k)-1(g)(4)(iii) requires that, for an intermediary to be a qualified intermediary, the intermediary must enter into a written "exchange" agreement with the taxpayer and, as required by the exchange agreement, acquire the relinquished property from the taxpayer, transfer the relinquished property, acquire the replacement property, and transfer the replacement property to the taxpayer. Intermediary , and as such does not offer or sell investments or provide investment, legal, or tax advice.