A 1031 exchange program may be valuable for an owner expecting to trade in an older, well-used property for a like-kind with more attractive features. Retail owners frequently use this procedure. Essentially, 1031 authorizes an owner to defer capital gains taxes that are commonly paid after the sale of a property.
1) Defer Capital Gains Taxes on the Sale
The principal purpose investors do a 1031 exchange is to defer paying taxes on a sale and utilize that cash as equity in a new property, as a wealth-building procedure. This procedure can be repeated multiple times in a lifetime.
2) Increase Cash Flow
Investors hold appreciated land or other non-income generating real estate and are on the lookout to exchange it for income-generating residential or commercial property. This boosts cash flow and allows them to live a better lifestyle especially as they head into retirement years.
3) Increase Basis for Fully Depreciated Assets
Investors carrying investment property for extended periods run out of depreciation expense when the asset matures to its full useful life for tax purposes. 1031 exchange offers investors the potential to reclaim basis and start the life of a depreciable asset again.
4) 1031 Exchange allows you to Convert to Primary Residence = Zero Tax!
1031 Exchange is a popular tax-free strategy accessible to American Homeowners. First, 1031 exchange an old investment property for like-kind property. After that rent out the new one for two years as dictated by Safe Harbor Ruling, Rev. Proc. 2008-16. After two years, homeowners can move into the new property and convert it to a primary residence, reside there for three more years, then sell it. The gains of the new property from the previous 1031 exchange gets dismissed as per the principal residence exclusion under section 121 of the IRC.
5) Greater Leverage Capability to Diversify Your Portfolio
If an investor is holding onto a highly appreciated property, they can leverage equity using 1031 exchange into two or more properties. This devises a diversified real estate investment portfolio used to hedge against losses in the value of other investments due to economic downturns or location.
6) Eliminate Day to Day Management Headaches
Rental Properties that have appreciated in value but require higher management can be exchanged into one property by consolidating. Investors can rid themselves of tenant issues and enjoy a hassle-free life.
7) Exchange into a NNN DST Managed Investment Asset
A 45-day time frame of 1031 to locate a property with the right price, financing and closing schedule is exceptionally tricky. A NNN DST investment is a real property that has a long-term tenant in place, generally with a high credit grade such as a Walgreens or CVS, that passes as replacement property for 1031 exchanges and gives steady cash flow without the trouble of maintaining the property. The tenant bears the responsibility of the maintenance, taxes, and insurance while investors collect the rent. NNN DST is considered the best option in a 1031 Exchange.
8) No more Absentee Landlord
In case an investor needs to move or relocate, executing a 1031 exchange to a location closer to the new address makes managing property easy and saves on the taxes.
9) Estate Planning
1031 Exchange can easily tackle estate tax issues. By adding children or other beneficiaries on the title to replacement properties, when 1031 exchange is done, most of the property taxes due on the passing of the owner are eliminated, as the value of the estate will shift to the beneficiaries before the date of death.
10) Foreigners can evade the 15% FIRPTA withholding tax in a 1031 exchange
Foreign nationals can also gain on the privileges of a 1031 Exchange , i.e., sell their U.S. Real Property Interests (USRPI) and defer tax on the sale, if they obey the 6 rules of a 1031 exchange. The final tax is calculated when the foreigner declares their tax return in the following year and then demands their refund once the final tax is deducted from the 15% withheld. 1031 exchange is an exemption to the FIRPTA. It can be obtained if a foreigner applies for a withholding certificate on the IRS form 8288-B before the sale.
1031 Exchange enables your money to churn the maximum profit for you. However, the exchange process is extremely complex in nature and it would be wise to seek guidance from expert professionals. We have extensive experience in handling highly profitable exchanges for our varied client base.
For consultation and assistance regarding 1031 exchange call - 888-993-2835 or email us at info@1031xchange.com.
