Internal Revenue Code Section 1031 allows business owners to exchange their real estate. Investors can exchange business or investment-use property for a like-kind investment. No gain or loss will be recognized. Done correctly, business owners can defer their capital gains taxes. They also defer 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)
- Move 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 primary or 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, please contact Midland 1031. You may call us at 239-333-1031 or schedule a free consultation by clicking here.