The majority of investors seldom use of one of the most valuable techniques for increasing and preserving their wealth once it is made: The 1031 Exchange. A Section 1031 property exchange allows you to postpone or potentially eliminate income taxes on the sale of qualifying assets.
Section 1031 tax deferred exchanges continue to increase in popularity as more investors nationwide discover the wide range of investment objectives that can be easily met by exchanging assets.
A properly structured exchange provides real estate investors with the opportunity to defer 100% of both Federal and State capital gain taxes. This essentially equals an interest-free, no-term loan on taxes due until the property is sold for cash! Most often, the capital gains taxes are deferred indefinitely because many investors continue to exchange from one property to the next, dramatically increasing the value of their real estate investments with each exchange.
Many investors exchange from a property where they have a high equity position or one that is "free and clear" into a much more valuable property. A larger property produces more cash flow and provides greater depreciation benefits, which therefore increase an investor’s return on investment.
Exchangers have a number of opportunities for diversification through exchanges. One option is to diversify into another geographic region such as exchanging of one apartment building in Denver, Colorado for two additional apartments – one in Los Angeles, California and the other in Dallas, Texas. Another diversification alternative is acquiring a different property type such as exchanging from several residential units to a small retail strip center.
Many investors accumulate several single family rentals over the years. The on-going maintenance and management of what can be a far-reaching group of properties can be lessened by exchanging these properties for one property better suited to on-site maintenance and management. Exchanging into a single apartment complex with a resident manager is a good example of this strategy.
Often a number of family members inherit one large property and disagree about what they want to do with it. Some want to continue holding the investment and some desire to sell it off immediately for cash. By exchanging from one large property into several smaller properties, an investor can designate that, after their death, each heir will receive a different property which they can either hold or sell.