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.
This information is for educational purposes only and does not constitute direct investment advice or a direct offer to buy or sell an investment, and is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisors for advice/guidance regarding your particular situation. Because investor situations and objectives vary, this information is not intended to indicate suitability for any particular investor. The views of this material are those solely of the author and do not necessarily represent the views of their affiliates.
Investing in real estate and 1031 exchange replacement properties may involve significant risks. These risks include, but are not limited to, lack of liquidity, limited transferability, conflicts of interest, loss of entire investment principal, declining market values, tenant vacancies, and real estate fluctuations based upon a number of factors, which may include changes in interest rates, laws, operating expenses, insurance costs and tenant turnover. Investors should also understand all fees associated with a particular investment and how those fees could affect the overall performance of the investment.
Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. Insurance products offered through Concorde Insurance Agency, Inc. (CIA). 1031 Capital Solutions is independent of CIS, CAM and CIA.