1031 Exchange? What is it?
Section 1031 of the Internal Revenue Code provides an exception to the rule that when you sell property, you must recognize any gain from the transaction and such gain is subject to capital gains tax. The 1031 rule allows the deferment of capital gains tax that would have been owed on such a sale. An exchange for like-kind property defers the capital gains tax, leaving the property owner with substantially more proceeds for purchasing replacement property – which may provide great leverage, diversification, geographic relocation, improved cash flow and/or property consolidation.
What are the benefits of a 1031 exchange for me?
- Deferral of capital gains tax with a current yield.
- Ownership of a higher-quality property.
- Freedom from the day-to-day management.
- Predictable cash flow.
What are the risks associated with a 1031 exchange?
Investors will be subject to all of the risks that are normally associated with real estate, including but not limited to the uncertainty of cash flow; changes in the investment climate for local real estate (such as declining values or increased supply of residential communities), changes in interest rates, cap rates and the availability of permanent mortgage funds; changes in real estate tax rates and other operating expenses; changes in local government rules; and acts of God or other disasters which may result in uninsured losses brought on by fires, floods, earthquakes, tornados, hurricanes, acts of terrorism; etc. |
