2. What are the advantages of a 1031 exchange?

The primary advantage of exchanging under I.R.C. Section 1031 is the preservation of working capital. If you sell property you must pay taxes on any recognized gain. These funds will no longer be available to you for investment. The capital gains and recapture taxes you must pay upon a sale can amount to almost 40% of your gain. In a tax-deferred exchange, all of your profit may be used to acquire replacement property, not possible if you deplete your working capital by paying taxes. 1031 exchanges allow greater net profits, the purchase of larger or additional investment property, and a faster pyramiding of wealth.

Exchanges are a great tax planning mechanism allowing, for example, the deferment of taxes until the taxpayer is in a lower tax bracket, or until a more beneficial tax rate exists. There are a myriad of other reasons for exchanging, including for example: consolidation of a number of smaller properties into one larger investment in order to facilitate easier management or better cash flow; shifting investment from one area or locale to another to take advantage of local market opportunities; avoiding "deferred maintenance" by trading out the older properties into newer ones; diversification of investment portfolios by trading out of a single property, or type of property, or type of property, into various investments or multiple properties, to name a few.

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