When people hear “1031 exchange”, they typically think about deferring the tax otherwise due on a pending sale, resulting from the appreciation (i.e., “capital gain”) their property has achieved since they acquired it.

But a 1031 exchange potentially can be more impactful than merely deferring one’s tax on increased value.

First, capital gains are based on both appreciation and depreciation. Most people report annual depreciation from their investment property, which can lower current income-tax bills. Yet when a property is sold, the IRS wants to “recapture” the claimed depreciation. A 1031 exchange can defer the recapture tax by effectively transferring the cost basis to the replacement property.

Second, a 1031 exchange can be an opportunity to transition from active to passive management. Triple-net, master-leased and professionally-operated properties can offer relief from the hassles of active ownership.

Third, an exchange may be a chance to diversify one’s real estate investment into multiple properties across different sectors (apartments, health care, self-storage, industrial, office, retail) and across different geographical regions (Midwest, Southeast, Mid-Atlantic, etc.).

Fourth, in some instances, investors can potentially achieve a different “current yield” after a 1031 exchange. It is important to remember that “current yield” is the income paid to an investor, divided by the current property value— not the original purchase price.

Finally, under current tax laws, a taxpayer may ultimately avoid capital gains tax altogether. This is achieved by deferring taxes in successive exchange transactions until passing away, at which time the heirs receive the property with a “stepped up” cost basis.

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Investors should understand all fees associated with a particular investment and how those fees could affect the overall performance of the investment. Neither 1031 Capital Solutions or its representatives, nor DFPG Investments, Inc. provide tax or legal advice, as such advice can only be provided by a qualified tax or legal professional, who all investors should consult prior to making any investment decision.