What are the Benefits of a 1031 Exchange?
The benefits to a 1031 exchange are myriad. Here are two key ones investors will receive:
Tax deferral: There are many taxes on the sale of appreciated real estate. Those include federal capital gains, state income tax, depreciation recapture tax and potentially net investment income tax (NIIT). So with a properly structured exchange, all these taxes are deferred, and the basis from the original property is rolled over. There are no limits on how many times an investor may complete a 1031 exchange. This encourages continuous property reinvestment. It also allows the investor to “exchange up” into higher-value properties for the rest of their lifetime.
This tax-deferred growth can be a powerful wealth-generating tool. Over time, without frictional and tax expenses, investors have the potential to substantially increase the value of their portfolios. To compare possible tax savings on a specific property by employing a 1031 exchange, use our tax calculator.
Estate planning: There is no limit on the number of 1031 transactions an investor can complete. So investors can exchange up to new properties and “swap until they drop.” When the investor passes away, the property can be passed on to beneficiaries with a fully stepped-up cost basis.
Delaware Statutory Trusts: Passive Ownership Every real estate owner has unique circumstances. And most who have accumulated assets during their lifetime want to transition into passive ownership. That means spending their free time on things they truly enjoy instead of the “three Ts” of active real estate management—toilets, tenants and trash, as the saying goes. In these cases, employing a Delaware Statutory Trust (DST) structure allows 1031 exchange investors to exchange their proceeds for an interest in a professionally managed asset and receive passive income.