Commercial property owners always strife to maximize all of the tax benefits or advantages that are available to offset annual taxes and fees. Most successful real estate investors use a powerful tax deferment strategy called a 1031 Exchange (also referred to as a Starker Exchange). This 1031 Exchange strategy offers solutions that can be used for various commercial properties. Are you interested in learning about how to do a tax-deferred exchange? There exists no better time to do so than now. In this comprehensive write-up, we will discuss how a 1031 Exchange works and the benefits it offers to investors.
To begin, let’s consider what a 1031 Exchange is all about. The 1031 Exchange strategy allows an investor to defer capital gains taxes on an investment property when it is sold. This is only possible if another like-kind property is purchased with the profit gained by the sale of the first property within a specific period. In a more general sense, a 1031 exchange is where one property is swapped or exchanged for another property of like-kind.
How 1031 Exchanges Work
The primary idea with 1031 Exchanges for commercial real estate is to complete the like-kind or similar exchange so that no revenue or proceeds are distributed to the investor. Because the proceeds aren’t received, it is not considered taxable based on the law established by the Internal Revenue Service (IRC). A new property being used in exchange for an old one maintains the continuity of the investment. This ensures that the loss or gain is not recognized when the properties change hands. This means that the present loss or gain in the original property is passed on to the replacement property.
It is worth noting that 1031 Exchanges are designed mainly for the exchange of commercial property. As a result, only individuals, C corporations, trust, S corporations, LLCs, and other groups are considered eligible to request a 1031 exchange. Hence, vacation residences and personal homes may not be eligible. Here are some rules that investors must follow to make 1013 exchanges successful.
- 1031 Exchanges must be conducted by a qualified intermediary.
- Titles to property should be held by just one person.
- The replacement property must be greater or equal to the original property in terms of worth.
- The properties exchanged must be similar.
Benefits of 1031 Exchanges to Investors
The primary benefit of using 1031 Exchanges for commercial real estate is that it reduces the tax burden and minimizes the out-of-pocket expenses for taxation. However, there exist other benefits that can be expected from 1031 Exchanges for commercial real estate. Here are just a few:
- Cash Flow Optimization: To increase overall income and cash flow in the future, adjusting the commercial real estate portfolio is an essential step.
- Property management: High-maintenance investments can be consolidated and rolled into other investment properties using 1031 exchanges. This is very appealing to most investors.
- Leverage into New Properties: The investor’s overall buying power is enhanced as the money that would have been paid to the IRS in taxes can now be rolled into the new purchase.
If you are considering a 1031 exchange for your commercial property, then, the above-mentioned information will be helpful to you.