5 Reasons to Consider a 1031 Exchange

If you are preparing to sell a piece of real estate, why should you consider a 1031 exchange? Under the right circumstances, working with a 1031 exchange expert instead of simply selling one asset and buying another can afford access to several benefits—and this is why 1031 exchanges are so popular among real estate investors. Before you start your next transaction, here are five reasons to consider a 1031 exchange:

Reason #1: Lawful (and Indefinite) Deferral of Capital Gains Tax

Conducting a 1031 exchange affords the opportunity to defer your capital gains tax liability—potentially indefinitely. Normally, when you sell an appreciated piece of real estate, capital gains tax liability is triggered immediately at the time of sale. But, when you conduct a 1031 exchange, this is not the case.

With a 1031 exchange, the transaction still triggers capital gains tax, but your obligation to pay this tax is deferred—and it remains deferred for as long as you own the replacement property or continue to conduct 1031 exchanges. There is no time limit on tax deferral under Section 1031, and if you realize losses that offset your gains, you can use these losses to reduce (or eliminate) your deferred capital gains tax liability.

Reason #2: A Wide Range of Real Estate Investment Options

To trigger capital gains tax deferral under Section 1031, a transaction must involve the exchange of one asset for another asset of “like kind.” This is why a 1031 exchange is also commonly referred to as a “like-kind” exchange. While it used to be possible to conduct 1031 exchanges with both personal and real property, the Tax Cuts and Jobs Act limited like-kind exchanges to real estate only.

But, within the real estate realm, the term “like kind” encompasses virtually all forms of real property. As a result, 1031 exchanges can involve the sale of a single-family residence to purchase vacant land, the sale of a strip mall to purchase an apartment building or almost any other permutation of selling one property and buying another.

Reason #3: Maximizing Investment Power

Since conducting a 1031 exchange can result in substantial (and immediate) tax savings, it also affords the opportunity to maximize your investment power. Instead of paying capital gains tax to the IRS, you can reinvest the full proceeds of your sale into a new property (or into multiple new properties if you choose). If you conduct multiple 1031 exchanges over time, your tax savings and investment power will compound—allowing for a substantial increase in your total return long-term.

Reason #4: Reducing Risk Due to Market Forces

Working with a 1031 exchange expert to leverage the benefits available under Section 1031 also allows investors to reduce their risk due to market forces. Suppose, for example, you were heavily invested in commercial office space before the COVID-19 pandemic. As we all know, demand for commercial office space plummeted. At the same time, with interest rates dipping to all-time lows, demand for residential real estate skyrocketed. Savvy investors who used 1031 exchanges to quickly exit their commercial holdings were able to mitigate their risk while profiting from rising home prices—and their ability to do so was due in large part to their ability to defer their capital gains tax liability.  

Reason #5: Access to Substantial Flexibility

While Section 1031 establishes strict rules and requirements for conducting like-kind exchanges, it also provides a substantial amount of flexibility. For example, we recently wrote about the ability to conduct delayed and reverse 1031 exchanges in order to adapt to changing real estate market conditions. Not only does Section 1031 provide the flexibility to conduct an exchange on a timeline that works for you, but it also provides flexibility with regard to the type (or types) of real estate you acquire. Real estate investors can even choose to accept “boot” from a transaction to reduce their debt load or free up cash for other acquisitions.

These are by no means the only reasons to consider a 1031 exchange if you are preparing to sell a piece of real estate. When you get in touch, we can explain everything you need to know so that you can make informed and strategic decisions about your next real estate transaction.

Speak with a 1031 Exchange Expert Today

If you would like to know more about the benefits of conducting a 1031 exchange, we invite you to get in touch. To speak with a 1031 exchange expert for free, call 888-872-1031 or get in touch online today.