WHAT ARE THE MAJOR BENEFITS WHEN TRANSACTING A SECTION 1031 EXCHANGE?
That question was an issue specifically requested to be covered in my presentation given at the national convention for the National Society of Accountants, last month.
Most of my bloggers are aware that Section 1031 provides that there will be no gain or loss recognized on the exchange of property held for investment purposes or used in the taxpayer's trade or business, the relinquished property, when exchanged for property that is "like kind" and will also be held as an investment or used in the taxpayer's trade or business, the replacement property. The result is that the federal government gives the taxpayer an "interest free" loan, because the taxpayer has all of their cash to invest into the replacement property, having deferred the payment of any taxes due.
The follow-up question is how does a taxpayer use this valuable tool?
The taxpayer can:
1. Exchange from depreciated property into a more expensive property, thereby obtaining additional depreciation;
2. Exchange from a piece of property that is not producing an adequate cash flow into a different property that will produce a better cash flow;
3. Exchange into a piece of property that the taxpayer believes will appreciate in value quicker;
4. Diversify into more than one property or different types of property;
5. Exchange old equipment for the newer version of the same equipment that is used the taxpayer's trade or business;
6. Exchange into property in a different part of the country, because the taxpayer wants to relocate to that part of the country;
7. Consolidate the taxpayer's existing investments into 1 or more larger investments;
8. Exchange property, such as raw acreage, that cannot be refinanced, into another property that can be financed;
9. Exchange from a management problem property into one that creates less headaches; and/or
10. Exchange into properties that will be more manageable for estate tax planning purposes.
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