Advantages of a 1031 Exchange
The taxpayer may dispose of property without bringing upon oneself any immediate tax liability. This allows the taxpayer to keep the earning power of the deferred tax dollars working for them in another investment. In effect, this money can be considered an interest-free loan from the IRS. There is no interest paid on the outstanding loan balance and there is no specific due date.
The loan will be abolished upon the death of the taxpayer, which means that the taxpayer's estate never has to repay the loan. The taxpayer who is entitled by law gets a stepped-up basis on the inherited property; that is, their basis is the fair market value of the inherited property at the time of the taxpayer's death. A subsequent sale by the heirs will be taxable only to the extent of the difference between the stepped-up basis and the net sale price.
1031 exchange is highly advantageous to the taxpayer as it enables the taxpayers to sell income, investment or business property and replace with like-kind replacement property without having to pay the capital gain taxes on the transaction. Section 1031 of IRS is the basis of tax-deferred exchanges.
Disadvantages of a 1031 Exchange
The main disadvantage of 1031 exchange is that it offers a reduced basis for depreciation in the replacement property. The tax on the replacement property is calculated on the basis of the purchase price of the replacement property minus the gain, which was deferred on the sale of the relinquished property as a result of the exchange. Thus the taxpayer needs to pay tax also on the deferred gain if he cashes out of his investment.
Minneapolis 1031 Exchange Intermediaries
At CPEC1031, we work with investment real estate owners of all shapes and sizes on their 1031 exchanges. Ultimately, a 1031 exchange allows you to defer capital gains taxes when selling real estate. We make that process as easy as possible for all our clients. Contact us today to learn more about the like-kind exchange process or to get your exchange started. You can find us at our primary office in downtown Minneapolis, or at one of our satellite offices located across the United States.
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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