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WHY SHOULD ONE CONSIDER DOING A 1031 TAX-DEFERRED Exchange?
You may have some non-income producing real estate investments, such as raw land. You could exchange this property for another asset that would not only give you cash flow, but also get you income tax deductions such as depreciation, which you did not have with your raw land.
You may have been holding properties long after their appreciation has topped out. You can start rebuilding your equity by disposing of those investments and acquiring new ones.
You may have management-intense rental properties and would prefer to transfer your equity to ease-of-ownership single tenant properties (coupon clippers) such as Walgreen Drug Stores, Wal-Mart, Post Offices, Circuit City, Office Depot, etc.
When selling real estate, if you sell and reinvest, you will pay income taxes on the realized gain. However, if you call it an exchange, you will.
This means that more money is available for acquiring your next investment. It can be regarded as a free loan from the government!
With proper estate planning you can keep exchanging properties throughout your lifetime. Neither you nor your heirs will ever pay income taxes on the gains. By doing a tax-deferred exchange, you conserve your equity by not having to pay taxes on your net profits.
You may have owned a leveraged property long enough to have accumulated considerable equity. You now have an opportunity to exchange into a larger asset, and reposition your equity to your benefit or that of your heirs, without paying taxes. We highly recommend using qualified professionals that have experience in 1031 tax-deferred exchanges to guide you and ensure your compliance with government regulations.
There are only two possible disadvantages worth noting. One of them being that you will have a slightly lower depreciation schedule when you acquire your new properties. This is because the IRS will look at your new tax basis as being the same as your previous one, less your deferred gain.
The other disadvantage is that losses on your income tax return cannot be deducted if you exchange property rather than sell it. If you want to take a loss, simply call it a sale, not an exchange.