Advantages & Disadvantages of 1031 Exchanges

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Services for Real Estate Pros with LifeOhm - Life Coaching for Real Estate Professionals

There are several advantages for many investors in a 1031 exchange. Some of these advantages are:

  • Defer payment of taxes without penalty or interest,
  • Consolidate or diversify investments,
  • Increase cash flow,
  • Relocate a business investment,
  • Eliminate management problems,
  • Leverage,
  • Financial & Estate Planning

Disadvantages

  • Transferred basis
  • Increased transactional costs including tax/legal adviser fees, exchange fees,
  • Tax consequences of accepting proceeds.

If you have a question about whether a 1031 Exchange is right for you, contact your CPA or Attorney. As a Realtor who is knowledgeable about 1031 Exchanges, I would be happy to help you with your real estate needs in a 1031 Exchange.

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Anonymous
Anonymous
radiofred

I am just finding out about another big disadvantage to the 1031 Exchange.  I was forced to sell one of the new buildings I received following a successful exchange.  I got hit hard on capital gains taxes based on the sale price of the relinquished property.

Unless you are going to hold on to these properties until you die, or plan to keep exchanging up everytime you sell, you are tied to the original purchase price of the first property you had before the exchange.

I may go back and amend tax forms to break the 1031 because I don't want to tie up three buildings that I exchanged up for.

Apr 05, 2007 07:37 AM #1
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LifeOhm - Life Coaching for Real Estate Professionals - Portland, OR
Monica at LifeOhm
You are correct, there is a holding period. It is recommended that you hold the Exchanged or newly purchased property for 1-2 years. Individuals should consult their CPA and Attorney regarding the holding period for your specific situation.
Apr 07, 2007 10:42 PM #2
Rainmaker
131,636
Bill Exeter
Exeter 1031 Exchange Services, LLC - San Diego, CA
1031 Tax-Deferred Exchange Expert

Radiofred,

I think you are viewing your situation as a "big disadvantage" when that is exactly why the 1031 exchange is a HUGE ADVANTAGE!  The 1031 exchange allows you to keep 100% of your cash (equity) invested and working for you.  Yes, you are correct, in that the gain and depreciation recapture are continually deferred by property to property (they accummulate over time), but the gains are still invested in your favor and are working for you.  It allows you to grow your networth significantly faster than if you paid the taxes as you go.  You will ultimately pay more in taxes in the long run, but that is because you have built your networth into alot more than you would have if you paid the taxes.  It's the power of tax deferral.  It's the same concept with retirement accounts.  The longer you defer the taxes the greater the value of your account.  It's a HUGE POSITIVE ADVANTAGE - not a "big disadvantage." 

 

Nov 13, 2007 07:06 PM #3
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