The vast majority of commercial real estate buyers don't make use of the wealth-building advantages of the tax-deferred 1031-Exchange. Once a property sale goal is realized, many owners sell the property, pay taxes, and then purchase other real estate, without using a 1031-Exchange. 1031 Exchanges are useful in a wide variety of circumstances. They provide excellent opportunities for resourceful buyers to create transactions which would not be possible through a sale-purchase format.
Sophisticated real estate owners know that leverage can maximize wealth. A 20% down payment can result in a 50% investment return with the right amount of debt and financial leverage. Tax deferment is also a type of leverage. Just as you use debt financing to leverage a purchase, you can use tax savings to acquire even greater wealth. With the successful use of tax-deferred 1031-Exchanges, a savings of 20% to 40% of capital gains tax and depreciation recapture on the sale of their prior property can now be retained to acquire larger properties. A buyer can accelerate his investment horizon by many years by carefully developing an strategy utilizing these exchanges.
The overriding advantage of a 1031 Exchange lies in the ability to move equity from property to property without having to pay the capital gains taxes. Exchangers can create an entire purchase program using the wide variety of benefits available, and a buyer can move successively from one 1031 Exchange to another any number of times. You don't need to wait until a property is under contract to get the process started. Please contact us to discuss your specific requirements.
The Internal Revenue Code Section 1031 (a) (1) says, "no gain or loss is recognized if property held for productive use in a trade or business or for investment is exchanged solely for property of a like kind to be held either for productive use in a trade or business or for investment." What does the code really mean? Property that is held for investment can be exchanged for any other property that is being held for investment and the owner will be allowed to defer paying capital gains taxes.
What are some properties held for productive use in a trade or business or for investment? The list includes apartments, single-family rentals, office buildings, retail centers, warehouses, farms, hotels, and raw land, to name a few.
The way the code reads, any combination of these properties can be exchanged. For example that means an apartment can be exchanged for an office building, a warehouse exchanged for a retail center, or raw land exchanged for a single-family rental.
In an exchange of real property for real property, the fact that any real property is improved or unimproved is immaterial, because that fact relates only to the grade or quality of the investment property and not to its kind or class.
Exchanging or "trading up" under Section 1031 and the 2004 IRS DST guidelines allows owners to re-invest in larger commercial properties while also deferring capital gains taxes. The most common reasons for exercising a 1031-Exchange are:
• Provides investors with lower minimum equity requirements
• Provides a more simple and efficient closing process
• Provides investors protection against loan recourse liability
• Provides the ability to act quickly when 1031 exchange issues arise
• Eliminates shareholder voting responsibilities
• Provides a simple structure for investors
• Eliminates annual LLC fees to investors
• Eliminates need for investors to provide tax returns to lenders
• Provides management-free income