Each investor will have a different reason for participating in an exchange of property. Here are some examples of why investors exchange:
– Cash Flow: Exchange bare land which produces no income for improved property that can create cash flow
– Business Use: Exchange out of a property for another property that can used to accommodate your business
– Location: Exchange property out of area for property in a closer location, or exchange for property located in a better market
– Appreciation: Exchange to a location where properties appreciate faster or exchange one type of property for another that appreciates more quickly
– Depreciation: Exchange from a fully depreciated property into a higher valued property that can be depreciated further
– Easier Sale: Exchange for property that is easy to sell (at a later date, of course!)
– Diversification: Exchange a large property to acquire numerous replacement properties, or exchange one type of property to acquire many different types of property
– Defer the Recapture of Depreciation: Exchange to defer the recapture of depreciation. For sales involving improved property, depreciation is currently recaptured at the rate of 25%!
– Capital Gains Deferral: Exchange to defer capital gains tax! By performing a 1031 exchange, a taxpayer is able to defer their capital gains taxes, and thus, has more cash available to acquire other, like-kind investment property!
Did you know that it is possible to sell a property, have no proceeds, and still owe capital gains tax? Capital gain is not the profit or equity from a sale; it is computed by determining the difference between the taxpayer’s sales price and the adjusted cost basis of their property.
Talk to a tax professional regarding your potential tax liability before completing a sale. A 1031 exchange may be the tool to help you reach your investment goals!Written by: Sarah B. Johnson, Exchange Coordinator
Certified Exchange Specialist®
Vice-President, Cascade Exchange Services, Inc.