Tax-deferred exchanges eliminate one of the major constraints to reallocating funds. Only a few investments allow you to reposition your assets without immediately paying taxes on the gains. Besides saving taxes, common benefits of an exchange are:
- Exchange non-income producing property for cash flow.
- Exchange to obtain a mortgagable property which can be refinanced.
- Exchange properties to improve potential appreciation.
- Exchange properties to better use your equities or build wealth by taking latent appreciation and repurchasing property with commensurate rents.
- Exchange properties to diversify your assets into different property types.
- Exchange properties to improve locations for convenience or quality of neighborhood or a completely different state.
- Exchange properties to avoid problem tenants.
- Exchange to consolidate smaller properties into larger ones.
- Exchange to increase the depreciation basis by acquiring property with a higher building to land ratio
- Exchange properties to move into a more passive investment and reduce management time.
- Exchange properties to avoid expensive maintenance and repairs.
- Exchange properties to replace high interest loans with lower ones.
- Exchange to change vesting into an LLC or living trust
- Exchange to preclude the triggering payment of deferred estate tax under IRC §6166
- Exchange properties, with proper estate planning, for you and your heirs to avoid paying income taxes on the capital gains.
So why don't more people participate in exchanges? Three reasons: one, they don't know about them, or two, they don’t understand the substantial benefits, or three, they think they are too complicated. Section 1031 has been available since 1921, but wasn't a major factor in real estate investment tax planning until the 1986 Tax Reform Act did away with preferential treatment of Capital Gains. Since 1986 many changes have been made in the Treasury Department Regulations to make exchanges easier and safer. Since 1991 exchanges have become more and more popular as a tool to help people meet their financial objectives.