1031 EXCHANGES do more than save taxes
At its core, a 1031 exchange is designed to accomplish one simple goal: to avoid taxes. But owners turn to 1031 exchanges to carry out a variety of business strategies. A retail owner might use an exchange to trade an old mall for a newer, trendier shopping center. In a more complex deal, an exchange can be part of an exit strategy for a partnership.
In a 1031 exchange, owners defer the capital gains tax they typically pay in a property sale. For instance, an investor that purchases a building for $20 million and then sells it for $50 million will avoid paying taxes on the $30 million gain.
To complete an exchange, an investor uses property instead of money as the medium for the transaction, essentially paying for the new property with the title of the relinquished property. The equity held by the investor in the new property must equal or exceed the equity held in the previously owned property. The key benefit of an exchange is that the investor is permitted to defer the 20% to 30% capital gains tax payments that would accompany a conventional sale.
Inland Group Inc. of Oak Brook, Ill., for example, acquired 85 properties valued at just under $1 billion last year and used 1031 exchanges to fund a dozen of those acquisitions. As a holding company that owns several private REITs, Inland has used the 1031 market to supplement its acquisition strategy since 1980, according to Joe Cosenza, vice chairman. Exchanges not only funnel capital into acquisitions, they form exit strategies for properties that have peaked in value.
Earlier this year, Inland exchanged the Shorecrest Shopping Center, a grocery-anchored property in Racine, Wis., for $6.2 million and rolled the proceed ...