Potential Benefits of a 1031 Exchange Tax Deferral Strategy
Tax Deferral Strategy
No gain or loss should be recognized on the exchange of real property held for business or investment when exchanged solely for like-kind property held for productive use in a business or investment property.
For example a person may elect to sell a residential rental for $1,000,000 as a relinquished property and diversify by investing in three replacement DST properties, one third in Student Housing, one third in Assisted Living, and one third in Climate Controlled Storage.
Potential for Increased Income
It may be beneficial to exchange properties with diminishing income for other property offering greater income potential.
Improved Purchasing Power
Rather than paying the tax on the relinquished property, use that money to purchase a replacement property of higher value.
Reprieve from Management Responsibilities
Often people become tired of the responsibility of property management and maintenance, and at this time they choose to exchange into properties which are fully managed for them.
Can’t Touch the Cash
A QI must hold the proceeds during the exchange. The investor can never touch the cash.
The IRS states that the property being sold, and the property being purchased must be like-kind.
The IRS guidelines state that an investor has 45-days from the date they sell their property to identify a potential replacement property.
The replacement property must have equal or greater amount of equity and equal or greater amount of debt.
Must Report the Exchange:
The investor must complete IRS form 8824, Like-Kind Exchanges, and include it as part of their tax return in the year in which they sold their property.