The benefits of a 1031 Exchange Fund are broad, including both broad tax deferral and a more liquid stock market.
Tax Deferral: Tax deferral is the biggest advantage of a 1031 exchange fund. The government only taxes capital gains when realized not when accrued. This can be very beneficial in many cases such as for example if an investor has unrealized gains and losses and wishes to liquidate their investment project or take other actions that require liquid assets without paying the corresponding capital gain taxes until later [allowing them to reinvest their money into other projects while at the same time not having to pay any type of penalty for doing so]. In other cases the status quo may be keeping their investment in one place but wanting to make improvements on it; again they would only pay the capital gain when realized.
Liquid Market: Another advantage is 1031 exchange fund liquidity. The exchange fund markets are more liquid because the investor has not yet “taken” their money off the market. Non-liquid assets or investments are difficult to get rid of or sell quickly without incurring a large loss especially in times of economic crisis, but by using a 1031 exchange fund an investor can easily exchange properties within days rather than months or even years which provides stability and liquidity. The ability to sell faster also benefits investors who wish to buy/sell several properties at once although they may still be on the hook for taxes if they haven’t held onto their investment long enough, so it is recommended that you speak with your accountant before making any moves. While this article discusses the benefits of 1031 Exchange Funds, it is not to be taken as legal or financial advice. Make sure to speak with an accountant before making any decisions. Then you should speak with our 1031 Exchange Fund Service Provider.
1031 exchange funds are also used in many cases by investors who wish to diversify their portfolios.
They’re much more diversified now they may actually benefit from the riskier investments they would normally avoid, because the gains incurred don’t include capital gains. The profits are rather deferred capital gains that will be paid at a future date which if calculated correctly can give them a higher return on investment than they otherwise would have had. Another advantage of 1031 exchange funds is that if an investor wishes to take some money off the table or liquidate some assets for other projects, this new project will typically qualify for 1031 deferral as well.
The convenience of a 1031 exchange fund is realized when investors have not yet identified their replacement property.
This is especially advantageous when dealing with commercial property where there are many unknowns. One could also utilize these funds for personal property, but the transaction costs of selling a small business or family farm can make 1031 exchange funds useless for those types of properties.
1031 Exchange Funds are prepared to defer taxes by purchasing replacement property before selling your original property.
They are unable to invest in new properties until their current one has sold. The most significant advantage of these funds is that it is not necessary to identify the future acquisition prior to the sale. This allows you time to do research on possible investments without having any tax liabilities until the actual purchase is made, which gives you more power over timing, etc..
When an investor decides they need to divest themselves of a property, the primary advantage of a 1031 exchange fund is that it helps defer capital gains taxes until a replacement property has been acquired. They allow investors to hold onto their investment properties for future appreciation and lock in their original purchase price as the basis for their new property. This allows the investor to avoid having to pay those accrued taxes on those built-in gains from now until they sell again on a determined closing date.
There are other steps that need to be taken before you can successfully complete a 1031 exchange fund, which is why it’s important to contact an accountant or tax professional in order to understand how they work and what all of this entails.
This article provides only general information about becoming familiar with the 1031 exchange fund program. It is not exhaustive nor should it be considered advice on any particular matter. The author explicitly disclaims liability for damages incurred by relying on these contents or related materials from third parties. Always seek the help of a qualified legal, accounting, real estate professional and/or such related professionals when dealing with specific legal or financial issues.