The Tax-Deferred Exchange

Wealth Building for the Savvy Investor

The tax-deferred exchange, as defined in Section 1031 of the Internal Revenue Code of 1986, offers investors one of the last great opportunities to build wealth and save taxes. A tax-deferred exchange is a transaction in which an owner of real property, held for investment, sells one property and acquires another property without paying any taxes. When properly executed, the tax consequence does not disappear, but is moved forward into the new property. This tax-deferred transaction is the essence of the §1031 Exchange. By completing an exchange, the investor (exchangor) can dispose of their investment property, use all of the equity to acquire replacement investment property, defer the capital gains tax that would ordinarily be paid and leverage all of their equity into the replacement property. To defer the capital gains tax, the exchangor must acquire "like-kind" replacement property and the exchangor cannot receive cash or other benefits.

In any exchange, the exchangor must enter into the exchange transaction prior to the close of the relinquished property. The exchangor and the qualified intermediary enter into an Exchange Agreement, which essentially requires that the qualified intermediary acquire the relinquished property from the exchangor and transfer it to the buyer by direct deposit from the exchangor. The qualified intermediary acquires the replacement property from the seller and transfers it to the exchangor by direct deed from the seller. The cash or other proceeds from the relinquished property are assigned to the qualified intermediary and are held by the qualified intermediary in a separate secured account. The exchange funds are used by the qualified intermediary to purchase the replacement property for the exchangor.

By using our "Team Approach", on a 1031 Tax Deferred Exchange, you have the added advantage of a qualified intermediary, an attorney and a real estate professional who work in harmony to assure you of a successful transaction.

The Advantages of Exchanging

Avoid Paying Taxes and Conserve Equity

The most common abjective of exchanging is to avoid paying the taxes associated with selling property. Even more importantly, you keep 100% of your equity working for you, rather than giving a portion to the IRS.

Move Real Estate Investment From One Geographic Location To Another

By using the exchange process, you can move your real estate investment from one geographic location to another. Often investors want to do this when relocating due to a job transfer or retirement.

Consequently, the couple that lives in Phoenix and is moving to Atlanta can relocate their house (under Section 1034), and their investment property (under Section 1031), all without paying any current tax.

Increase Cash Flow

Some investors use exchanging as a way to sell a property with either no current income or a small return and replace it with one that provides better current cash flow. Property that is not providing enough income may be exchanged for a better performing property. This can be done if you own raw land and receive no income from the property. An investor may decide to sell his raw land through a tax-deferred exchange and acquire income-producing property that will produce cash for him each month.

Improve Investment Appreciation

You may want to take advantage of an opportunity to invest in a property that has greater appreciation potential than your existing property.

Consolidate or Diversify Investments

Some investors will sell multiple properties and exchange into one larger property to reduce the management and accounting work associated with owning multiple real estates.

Eliminate Management Hassles

Exchanging is a method that can be used when selling a time-intensive property (such as a shopping center) and reinvesting in a type of property that requires less attention (such as a single-tenant warehouse).

Keep 100% of Equity working Into The Future