#10 To consolidate or diversify real estate investments. By selling multiple properties and buying one larger replacement property, you lessen management responsibilities and may also be able to geographically consolidate property. For those investors who own one larger property, exchanging can allow them to sell and diversify into other types or locations without having to pay any tax.
#9 To pull equity out tax-free by refinancing. One of the primary advantages of a 1031 exchange is not having to pay tax that otherwise might be due. One disadvantage is that all of the proceeds must be reinvested in the new property to defer all taxes. Investors can convert their equity into cash by completing the exchange– using little or no leverage on the replacement acquisition– and then subsequently refinancing the property. The refinancing proceeds are not taxable.
#8 To change your real estate investment to a different asset class. There are times one particular asset class, like office, may be on a long-term downward trend. Exchanging can allow an investor to move out of office property into another type of property that may be on the rise.
#7 To transfer a greater amount of wealth to your children through a step up in basis. When you sell highly appreciated property later in life, it lessens the value of your estate because of the tax that was paid. It also fails to capitalize on the principle of compounding. A 1031 exchange is the perfect tool to maximize the value of your estate and build greater wealth for your heirs. Additionally, upon your death, your heirs receive a step up in basis, so tax is never paid.
#6 To upgrade the quality or return on your current investment. Sometimes a property doesn’t perform as expected or the return starts to decline. Sell the underperforming asset and replacement it with a property that has a better anticipated yield.
#5 To build your ideal replacement property through a construction exchange. If you have a need for a property that must have certain specifications or an exact location, and enough construction value can be put in place within six months, then a construction exchange may be the perfect strategy.
#4 To move your property from one geographic location to another. For investors who are moving to a different state and want to take their investment property along, a 1031 can help accomplish that goal. Other investors may be tired of the long miles between three different rental houses they personally manage and want an easier trek. Through a 1031, they can sell the properties they own and buy property in a location that better suits their current lifestyle.
#3 To sell management intensive property and buy more of a passive investment type property. For the investor who personally manages rental homes, or other multi-tenant property, the thought of owning a larger, professionally-managed investment can be very attractive. Using a 1031, they can eliminate management headaches by exchanging into a triple-net leased property where the tenant takes care of everything or into a fractional interest in a larger commercial property that is being professionally managed.
#2 To convert land into income-producing property that also provides a depreciation deduction. While land can be a very good investment, it usually does not produce cash flow. If you need or just prefer income, an exchange will allow you to trade into income-producing property without having to pay any tax. With this strategy, investors also gain a depreciable asset that will provide a tax shelter for some, if not all, of their rental income.
#1 To build much greater wealth through compounding, time and leverage. Exchanging allows you to keep all of your money working for you— not only now— but most importantly, into the future. There is a reason that Einstein said that compounding is the most powerful force in the universe. It has made many a millionaire. Exchanging allows you to keep your equity working for you into the future.
I hope these points have expanded your view of what a 1031 can do. Exchanging is an excellent tool that can not only accomplish the objectives listed above but much, much more. Please feel free to contact us if you have any questions or would like us to assist you with a 1031.
