There are many reasons to do a 1031 exchange.
An exchange is a very simple concept. As a real estate investment property owner, you are exchanging your current (relinquished) property for replacement property and reinvesting all the proceeds. Think of an exchange as trading in your relinquished property value and getting replacement property at the same value or higher to defer paying the taxes normally owed when you give up property that has gained equity.
The result of trading your relinquished property, getting replacement property and reinvesting all the proceeds is the tax law lets you defer paying the taxes when you give up your relinquished property as long as you replace your investment with more real estate.
Change to Cash Flow Property
Investors who own raw land rarely have cash flow property. A “like-kind” exchange is real property for replacement real property. If you give up investment land, you can buy a rental property to generate rental income. You are not stuck with non-cash flow type property.
Change property types and locations
If you currently have property that isn’t performing well, you can exchange that property for a different property type and/or location. A like-kind exchange is any type of real property currently held for investment or business use for any type of real property that will also be held for investment or business use. You can exchange a poorly performing rental townhouse and replace it with a 7-Eleven or a single-family rental home in a great rental neighborhood.
An exchange gives you the opportunity to trade/exchange into property that is potentially a great new opportunity. Trade from a small condo in a neighborhood saturated with competing rental condos into a small commercial office building next to a new hospital that has a great opportunity for growth. Exchange out of an area of town that is declining into a newly developing area.
Many of our clients are planning their estates and want to make sure they leave their heirs properties that can be easily dealt with. Leaving behind a warehouse to multiple heirs might potentially cause family friction. Exchanging from a single property into multiple replacement investments to later leave each heir an individual property might be a more amicable solution.
An older property with potential maintenance issues can be exchanged for newer property with fewer potential headaches. A small rental condo can be exchanged for a NNN rental, like a Dollar General store or a Burger King which might be easier to manage and provide a better investment return.