1031 Exchange – Pros & Cons

Advantage and Disadvantages of 1031 Exchange

Advantages of 1031 Exchange:
1031 exchange is highly advantageous to the taxpayer as it enables the taxpayers to sell income, investment or business property and replace with like kind replacement property without having to pay the capital gain taxes on the transaction. Section 1031 of IRC is the basis of tax-deferred exchanges. The “safe-harbor” Regulations was issued by the IRS in 1991, which established approved procedures for 1031 exchanges. With the issue of this regulations tax deferred changes became easier, affordable and safer than before. Prior to this regulation, such exchanges were subject to challenge under examination on a variety of issues.

Disadvantages of 1031 Exchange:
The main disadvantage of section 1031 exchange lies in the fact that it offers a reduced basis for depreciation in the replacement property. The tax on the replacement property is calculated on the basis of the purchase price of the replacement property minus the gain, which was deferred on the sale of the relinquished property as a result of the exchange. Thus the taxpayer needs to pay tax also on the deferred gain if he cashes out of his investment.

This document/post/article is not to be considered as legal advice. Content and information contained herein is subject to changes, modifications, and may contain inaccuracies or out-of-date information. As with any legal matter or other matters of importance, consultation with an attorney or professional is the best course of action.

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