Is There A 1031 In Your Future?

A lot has been written about the virtues of Section 1031 exchanges, the so-called like-kind exchanges. The attraction is very simple, it defers taxes to a later date, and there seems to be universal appeal to that. But there are some drawbacks which I will highlight below.

But first, the basics. At its core, a like-kind exchange permits an investor to acquire more expensive property than the property being sold. Generally this means trading up in terms of equity and debt, because the taxpayer cannot take cash out (it is "boot"), and cannot decrease the debt. Many investors look to decrease their leverage and increase their cash flow by essentially rolling their equity into a new property, but this is not generally permitted. So an $800,000 property with $600,000 of debt cannot be traded for a $200,000 debt free property.

Once the first property is sold, an investor generally has 45 days to designate a new property, and then 180 days to close. As a word of caution, there are pitfalls that exist such as filing a tax return prior to the running of the 180 day period that may trip up the transaction or identifying too many properties, so an investor will need to have competent advisors to guide through the process.

Primary Reasons For Engaging In A Like-Kind Exchange

Reasons To Consider Not Engaging In A Like-Kind Exchange

Conclusion

While like-kind exchanges are still a powerful arrow in any investor's quiver, one must still understand the motivations, expectations and pitfalls inherent in this strategy.

David G. Estes
Attorney
San Francisco, CA