The primary advantage of a tax deferred exchange is that the taxpayer may dispose of property without incurring any immediate tax liability. This allows the taxpayer to keep the “earning power” of the deferred tax dollars working for him or her in another investment. In effect, this money can be considered an “interest free loan” from the which can be increased through subsequent exchanges. Under current law, this tax liability is forgiven upon the death of the taxpayer- the taxpayer’s estate never has to repay the “loan.” The basis on inherited property is also stepped up to the fair market value at the time of the taxpayer’s death. Business considerations should play the dominant role in a decision to make an exchange, for example, need or desire to: consolidate (or diversify) investments; obtain greater appreciation on the real property; increase cash flow; relocate a business investment; eliminate management problems. Click for tax calculator.

The taxpayer should also consider the disadvantages of a tax deferred exchange, including: reduced basis in the replacement property, resulting from the carry-over of the basis of the relinquished property; lower depreciation deductions; possible additional escrow, attorney, accounting, intermediary and accommodation titleholder’s fees. The taxpayer may not (without tax consequences) use any of the net proceeds from the disposition of the property for anything except reinvestment in real property.
 

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The information on this website is an educational resource only, and not intended as legal, accounting, or tax advice of any kind.
It is recommended that you consult with your own attorney or tax advisor for details before choosing to engage in a 1031 Exchange