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Tax Deferral Benefits
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Income Tax Deferral.
The primary benefit of a 1031 exchange transaction is that the taxpayer pays no income taxes at the time of the transaction. Any taxes due are deferred until the new property is sold in a taxable transaction.
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Reinvestment of all equity.
The taxpayer has more equity to reinvest by not having to pay income taxes now. By investing the larger equity, the taxpayer has the opportunity to accumulate greater wealth.
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Leverage.
The taxpayer may leverage the replacement property with a loan, allowing the taxpayer to purchase a larger, more valuable piece of property while investing only the equity from the sale of the relinquished property.
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Continuity of Depreciation.
The taxpayer can continue with the same depreciation life and method that applied to the original (relinquished) property, resulting in a lower percentage of depreciation expense to the total basis.
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Increase Cash Flow.
The taxpayer may exchange low or non-income producing property for property that produces improved cash flow with minor, if any, tax consequences.
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Potential Income Tax Avoidance.
Because the basis in property is stepped-up to fair market value at death, if the taxpayer continues exchanging property, income taxes can be entirely avoided.
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Relocation of Investment Property.
If the taxpayer moves to a different location, he/she may want to have their investment property close by as well. By exchanging, the taxpayer would suffer no tax consequence as a result.
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