When a Tax-Deferred Exchange May Be Appropriate
There are certain circumstances in which a Section 1031 tax-deferred exchange may be appropriate. Learn more about these situations below.
One of the most common uses of Section 1031, and for years after 2017 the only situation when Section 1031 applies, is to defer gain from real estate sales. Here are some examples of reasons an exchange should be considered:
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Taxpayer is a hands-on landlord and is relocating and wants his rental property close by where he can keep an eye on it.
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Taxpayer is a hands-on landlord but is getting tired of the day-to-day issues of residential real estate and wants to exchange into a less demanding type of property such as triple net commercial property.
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Taxpayer is approaching retirement and wants to get rid of the work associated with his rental properties but does not want to pay the taxes currently that will result from a sale., He can exchange into what is commonly referred to as a tenant-in-common (TIC) arrangement where he can receive a guaranteed return without any responsibilities.
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Taxpayer feels his property is poorly located or has maxed out on appreciation and wishes to exchange to another area.
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Taxpayer has significant equity in his property which will allow him to leverage his equity and move up to a more costly property where he hopefully can better benefit from appreciation.