Most real estate investors recognize the obvious benefit of a 1031 tax deferred real estate exchange. It is a powerful tool that accomplishes a variety of investment goals. It is critical for our clients to have the ability to defer the capital gains tax imposed on the sale of property. To qualify for this deferral, strict adherence to Section 1031 of the Internal Revenue Code and all of its rulings is imperative if 100% of the gains from the disposition of investment property be deferred into a new replacement property.
We at Oliver Smith Realty and Development Company, Inc. will help you with the advanced planning for the exchange. However, we recommend that anyone contemplating a exchange seek the advice of their accountant, attorney, a lender and Qualified Intermediary. With the potential for substantial tax savings in every transaction, tax deferred exchanges have become a necessary procedure for owners of business and investment properties of all types and sizes. Transactions of this type entails specific contractual and closing details that differ greatly from traditional real estate sales. Our real estate professionals will help the client coordinate these details.
There are five (5) major advantages of a 1031 Tax Exchange:
1. Investment property can be transferred from one location to another. Investors who move can exchange for properties closer to home. An exchange also may be a way to buy a replacement property in a site ideal for future retirement.
2. Current cash returns can be improved without sacrificing equity. Because of retirement or another life-style change, an investor may want a property that produces a higher monthly income instead of the property he or she currently owns that might increase in value over time. Exchanging allows an investor to swap for a property that produces a higher monthly income without incurring any current tax liability.
3. Greater investment appreciation may be gained without a large tax bill. Some high-bracket investors may wish to forgo current income to accumulate future equity. Using a tax-deferred exchange makes it possible for investors to “sell high and buy low” and keep the entire profit working for them.
4. Investments can be consolidated or diversified. Changes in an investor’s philosophy may necessitate real estate portfolio changes. Exchanging makes it possible for an investor to sell a group of properties and transfer the equity into one larger piece of property. It’s also a good tool to redistribute investment risk among a variety of property types or locations.
5. Management hassles can be reduced or eliminated. An investment property requiring frequent and time-consuming attention may be exchanged for one requiring less hands-on management or one that is professionally managed.