With robust economic growth and real estate appreciation, new and seasoned investors are more willing to take advantage of Section 1031 of the IRS. As more development is occurring in the real estate realm, and increasing in disposable income of investors, 1031 exchange real estate offers multiple benefits, including consolidation, leverage, diversification, hassle-free management, regular cash flow, and property appreciation. The tax-deferred scheme of the 1031 exchange allows you to acquire more lucrative property. Instead of paying the capital gain tax, the equity could be utilized for a down payment and purchasing a more exclusive like-kind property. Thus through leveraging cash, you can create a real estate portfolio that is secure and profitable.
The flexibility aspect of Section 1031 exchange allows you to swap one property for another, consolidating several assets under one umbrella. The like-kind property is not used in the strictest term; the phrase is amazingly tolerant. You can exchange an apartment for a retail strip center or a duplex for agro land. Typically provisions under 1031 apply for investment and commercial property, but under certain circumstances, it is pertinent to a former principal residence. For taxation, an abode where an individual, duo, or family resides most of the time is treated as a principal residence. It could be a mansion, apartment, boat, or trailer. But mandatorily, both properties must be situated within US territory. There are a few clauses under Section 031 which can be used to swap vacation homes, but the ambiguity is much more restricted than it used to be.
If you own several rental properties, intensive management, and expensive renovation are required to preserve the property value and regular income flow, which often increases the overhead cost. You can swap high-maintenance rental properties for an apartment building, or NNN leased investment. There is a special provision when you exchange depreciable property. The proceedings of such property are treated as depreciation recapture and taxed as regular income. While swapping one building for another, you can evade this recapture, but if the exchange is in favor of vacant land in lieu of developed land with construction, then the claimed depreciation on the structure will be recaptured as ordinary income. There are many intricacies in the 1031 exchange, and you need professional help to resolve these issues.
Extra edge and plasticity
A NAR survey conducted in 2015 exhibits that the flexibility of like-kind property exchange gives entrepreneurs extra edge and plasticity, especially when the trade is for a property with better economic use. An innovative business idea could improve the economical use of an existing property; swapping a like kind of trade would permit the relocation of the property and the realization of the financial incentives. This aspect enables more efficacy of capital deployment for investment openings. The same NAR appraisal projected 40% of all RE deals would not have taken place without the 1031 exchange. Section 1031 of IRC is undeniably an incentive for real estate deals. If you inherited assets, including real estate, unlisted stocks, and other financial instruments, you do not have to pay capital gain tax to vide section 1031 of IRS. The section decreases capital gain tax liability inherited by heirs by not accounting for any appreciation that occurred during the lifetime of the deceased.