Benefits of 1031 Exchanges in Commercial Real Estate

A 1031 tax deferred property exchange allows you to defer taxes on the property sale. You will have more money in hand to invest in another property. This benefit translates into investment savings. In effect, you receive an interest free loan from the government in the amount you would be paying in taxes. The Federal Government will tax your gains 15 percent (or more), and some states take an additional sum of taxes. With the 1031 tax exchange, you defer these taxes.

The tax dollars saved may be utilized to increase cash flow and overall net worth. The combination of the effects of leveraging equity in investment property over several holding periods can potentially produce higher dollar returns, cash flow and new depreciation schedules.

The only way you can completely avoid the taxes in a 1031 exchange is if you hold the property until death. As of now, the “stepped up” basis that your heirs would inherit on your property would eliminate the taxes on the gain. Basis is the initial investment in the original property plus capital expenses minus depreciation. It is used to calculate the amount of capital gains you will realize.

There are several types of exchanges we will discuss in a later article. They include:

Concurrent Exchange
Construction Exchange
Reverse Exchange
Personal Property Exchange

Each person’s financial situation is different. In some cases, a tax deferred exchange may not benefit the seller. You and your tax advisor should do a calculation to measure the benefits.