The majority of my bloggers are aware that doing a Section 1031 tax deferred exchange allows Taxpayers the privilege of not having to pay their federal capital gains taxes, depreciation recapture taxes and state income taxes (if any) on the property they held for investment or on the property that they used in their trade or business. Whew--that was a long sentence.
So deferral of payment of taxes is a major reason astute Taxpayers use Section 1031 of the Internal Revenue Code. But there are numerous Non-Tax reasons to do a 1031 exchange. I will cover some of these reasons in this blog and will continue with more reasons in the next blog. Let's begin. Non-Tax reasons to do a Section 1031 Exchange:
1. Taxpayers may want to sell a property that they have fully depreciated and exchange into a more expensive property that can be depreciated.
2. Taxpayers may want to exchange a property that is not producing income into a piece of property that does produce an income stream. The typical example would be the exchanging of a piece of raw acreage into a replacement property, such as an office building that produces a positive cash flow. A lot of retirees do this type of exchange, because they are looking for that income stream in their retirement years.
3. Taxpayers' "Property of Their Dreams," becomes available and so they exchange an investment property they are not particularly fond of for the "Property of Their Dreams."
4. Taxpayers exchange a property that is not producing a satisfactory cash flow for another that will produce a higher cash flow.
5. Taxpayers want to diversify their investments. They might own one large property. They could sell the property (relinquish it) and purchase (replace) with numerous investment properties. They may want to diversify because they would like to have properties in various different states so that if one state has an economic problem, the rest of their assets are not affected. Or they might want to own different types of property. For example they could exchange a large office building and replace it with a small strip shopping center, an office condominium, and other property--all being different types of real estate. Remember--the property sold (relinquished) must be "like kind" to the property purchased (replaced). In the case of Real Estate, all real estate is "like kind" to any other type of real estate.
6. The Taxpayers may want to exchange a property that is not appreciating at the rate they would like for another property that has a better possibility for increased appreciation.
7. The Taxpayers may decide to do a 1031 exchange because the present property they own may be harder to sell in the future and the replacement property may be easier to dispose of in the future.
REMEMBER: IT IS IMPORTANT TO HIRE AN INDEPENDENT QUALIFIED INTERMEDIARY WHO IS KNOWLEDGEABLE IN THE ENTIRE 1031 EXCHANGE PROCESS. We will continue with more Non-Tax Reasons for a 1031 exchange in our next blog.
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