Many real estate investors who hold on to their properties for long-term rentals commonly use the 1031 exchange. This tool, also known as a like-kind exchange or Starker, allows investors to up-value their properties and avoid / delay paying capital gains tax. In fact, many long-term investors become serial exchangers, building wealth as they replace older properties with newer and more valuable ones while delaying their tax liability in the process.
To most people, the idea of delaying / avoiding a tax liability is appealing. But is it always the right move? In this article I provide a review of the 1031 exchange including pros and cons.
- Tax deferral
- No tax liability upon death
- No limits
Potential disadvantages are;
- Qualified Intermediary Required
- Strict Time-frames
- Severe repercussions if it fails
- No access to cash
- Failure to consider loans
Deciding if a 1031 exchange is right for you will depend on your specific financial situation and goals, so always consult a tax professional.