Why consider a 1031 exchange?
Tax Deferment
This is the most widely known benefit. When an investor completes a 1031 exchange, they can defer 100% of the Capital Gains and Depreciation Recapture taxes, even most state capital gains taxes.
This means that real estate investors are able to preserve a majority of the value of their investments each time they sell and reinvest. Since the taxes are indefinitely deferred, this can mean substantial amount of preserved portfolio value.
For example: An investor sells an investment property and has a $100,000 Capital Gains tax, he/she has $100,000 more to invest and can buy a bigger property with better potential cash flow.
Consolidation
In some cases, an investor may not want to manage properties in multiple locations, like spread out over a city or in multiple states.
For example: An investor has 4 single families in several different cities and combines the sales into a apartment building.
Diversification
Some investors like to keep their options open, so they will look to keep multiple, and in some cases, different types of properties.
For example: An investor owns several apartment complexes and decides to add a shopping center to her portfolio.
Increased Cash Flow
An investor can replace his/her current investment property(ies) with those that have a better cash flow without sacrificing the money needed to pay the Capital Gains and Depreciation Recapture taxes.
For example: An investor owns land and buys several single family properties.
Relocation
Sometimes we need to move our family, business, etc. When a real estate investor needs to do this, they can use an exchange to move their properties with them.
For example: An investor sells his 3 single family properties in NY and exchanges them for 3 single families in Miami.