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The most important advantage of a 1031 exchange is that you
can defer all capital gains indefinitely. No limit is placed
on the number of such exchanges in your lifetime.
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An investor can easily start out with a small rental property
and regularly “1031 exchange” it for larger properties,
eventually leading to a substantial retirement income.
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As long as you never sell an investment property without exchanging
it for another, you’ll never have to pay taxes on your
real estate capital during your lifetime.
- When you die, your heirs may even be entitled to receive a
stepped-up basis on your investment property and escape paying
taxes on the capital gains you deferred throughout your life.
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Another popular advantage of a 1031 exchange is trading up.
There are two types:
1. Buying a bigger property or increasing the overall amount
of your real estate investment.
2. Buying a higher-quality property.
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Leveraging is another way to take advantage of a 1031 exchange.
It’s simply the idea of putting as little of your own
money as possible down on a property, and maximizing the financing.
It’s a strategy that works great in an up market, but
can be disastrous in a down: if the property is too highly leveraged,
the rental income will never support the debt.
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It’s also possible to use a 1031 exchange to buy a larger
or more valuable property for the additional depreciation. The
adjusted basis of the relinquished property, however, will transfer
to the replacement property. That means the replacement property
only provides additional depreciation for the amount of value
beyond the market value of the relinquished property.
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1031 exchanges can simply be used to lighten one’s workload.
If you own a high-maintenance property with lots of turnover,
you may prefer to exchange it for something with lower turnover
and maintenance requirements.
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If necessary, you can always use a 1031 exchange to relocate
an investment nearer to you. This can come in handy if you’re
forced to move for any reason (but it only works for property
inside the U.S.).
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1031 exchanges are also known as “like-kind exchanges”
because you have the option of using them for more than just
real estate. You can exchange many business and investment capital
assets for like-kind property, such as aircraft, boats, trucks
or even livestock – the only catch is that they always
have to be traded for the exact same kind of property.
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Real estate can be exchanged for just about any other kind
of real estate – as long as it’s used for business.
A primary residence, a vacation home, or a second home, for
instance, can’t be used in a 1031 exchange.
Disclaimer: This article is provided for information
use only. It does not take the place of an attorney, a tax advisor,
or an accountant. Always seek out the advice of a licensed professional
before undertaking any significant change in your financial situation.
We at Valerie Fitzgerald and Associates realize that you are in the information gathering stage of your purchase and we respect your privacy. Should you have any questions, please feel free to email us at info@valeriefitzgerald.com or call us directly at 310-285-7515. If you or anyone you know is looking to buy or sell a home, please note that we can provide detailed information and access to:
You can count on the services of Valerie Fitzgerald and Associates to provide you with information you can trust.
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