Most investors complete a 1031 exchange to defer the 1031 capital gains tax on the sale of their real estate investment property. However, there are several other reasons investors use 1031 exchanges, most of which pertain to lessening investment risk, improving cash revenue, and reaping the reward of property appreciation. These are just a few of the non-tax motivations to use a 1031 tax exchange. Other non-tax motivations for using 1031 exchanges include:
- You can sell a fully depreciated investment for a more valuable asset, which can be depreciated through the 1031 exchange using the greater increased value portion of the transaction.
- If you own a raw piece of land, you can exchange it for a building of equal or greater value, and then refinance the property. This gives you options for taking cash out of the purchase through refinancing and receiving a generous tax break from the depreciated building.
- You can use a 1031 exchange to rid yourself of non-income producing raw land by trading it for a positive cash flow revenue source such as a triple net property or Delaware Statutory Trust (DST) property.
- With a 1031 exchange, you can trade a sluggish or slowly appreciating investment for an investment in a bustling area that will provide increased value for years to come.
- If you own an investment property that will take a long time to sell, your long-term economic goal requires cash, and you would like make a real estate investment in the meantime, you can use a 1031 exchange to acquire a more liquid asset, such as a Walgreen’s or McDonald’s property, that you can sell in the short-term.
- If you move to a different state and find it difficult to manage your property, you can use a 1031 exchange to acquire a property that is closer to your new home.
- If you are approaching retirement age and don’t want to deal with management intensive properties, you can use a 1031 exchange to acquire properties that are more passive.
- 1031 exchanges are ideal for investors who own multiple properties and want to consolidate them into a single high credit property that requires minimal management duties.
- If you own a large asset, you can use a 1031 exchange wish to diversify it into smaller commercial investment properties. This approach is helpful for estate planning when it comes to dividing estate between heirs.
- If you are a professional, such as a business owner or doctor, you can exchange a property for a new professional building that will house your business.
- Using a 1031 exchange, you can trade out of a fractionalized interest in one asset to a fee interest in a different investment property.
- You can use a 1031 exchange to diversify your portfolio and spread your risk over different types of real estate by acquiring various types of properties in different locations.
