The sale of a business (or other investment asset) whether it is real estate or capital equipment creates a large tax liability. A properly structured Tax Deferred Exchange under Internal Revenue Code §1031 allows businesses and individuals to defer capital gains as long as new assets are purchased to replace the existing assets (upleg) within specified guidelines.
What are the benefits of you, the Investor, of an Exchange as opposed to selling your property and “cashing out”?
Leverage: Exchanging from a high equity position or “free and clear” property into a much larger property with some financing in order to increase the return on your investment.
Diversification: Exchanging into other geographical regions or diversifying by property type such as exchanging from a duplex into a retail strip center.
Management Relief: Exchanging out of multiple properties, i.e. 10 single family residences, into a multi-unit complex with an on-site manager.
Deferring Payment of Taxes: The ability to defer the payment of income taxes allows the Real Estate investor to reinvest 100% of their equity in replacement investment property and consequently improve their cash flow and net worth.
1031 tax-Deferred Exchanges are wealth building tools.
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