The benefits of IRC Section 1031 exchanges can be tremendous! Conversely, the damage of not doing an exchange can be simply devastating. Investors are often able to defer tens or even hundreds of thousands of dollars in capital gain taxes, both at federal and state levels. If the requirements of a valid §1031 exchange are met, capital gain recognition will be deferred until the taxpayer chooses to recognize it. This essentially results in a long-term, interest-free loan from the IRS. Additionally, upon the death of the property owner, heirs may inherit the property at a stepped up cost basis – eliminating the tax burden completely. Note: While we can provide exchangors with an understanding of general tax ramifications of an exchange, 1031 Exchange Place does not provide tax advice. We encourage exchangors to always seek the assistance of their tax advisor to best understand their specific tax liabilities.
Let’s take a look at a few scenarios to show the power of a 1031 exchange.