Internal Revenue Code Section 1031 allows business owners to exchange their real estate for productive use in a trade or business for other like-kind investment or business-use property. No gain or loss will be recognized. Done correctly, business owners can defer their capital gains taxes, depreciation recapture taxes, and alternative minimum taxes (if applicable).
Why would a business owner want to exchange out of his or her current business-use property?
RELOCATION OR EXPANSION/DOWNSIZE OF THE BUSINESS
- Find a better location to serve clients
- Expand the number of locations (sell one location and buy multiple locations)
- Relocate company Headquarters to an updated facility
- Consolidate locations or buy a smaller building that reduces space and cost
GENERATE MORE INCOME
- Exchange business-use property for another type of investment property that generates more income. Consider revenue-producing commercial property such as strip centers or office buildings. Click here to learn about the various types of commercial properties that apply for 1031 exchanges.
- Free up cash. After a 1031 exchange, consider refinancing the asset. Reinvest all equity and cash into the new property after a 1031 exchange for this option.
EXIT STRATEGY FOR BUSINESS OWNER
- Retiring business owners can sell their real estate for a rental home or condo. Use the acquired property for a vacation rental. After a few years have passed, the owner can convert the property into their residence or a second home.
- Reduce management obligations. Exchange into more easily managed properties. These properties can include land, triple-net investments, or Delaware Statutory Trusts (DSTs).
- Use a 1031 exchange as an estate planning tool. Any 1031 exchange property transfers to your heirs upon your passing. The property transfers on a stepped-up basis. The IRS forgives all capital gains and depreciation taxes.
For questions or more information about 1031 Exchanges for business-use property, please contact Midland at 239-333-1031 or schedule a free consultation by clicking here.