Exchanging or “trading up” under Section 1031 and the 2002 IRS TIC guidelines allows owners to re-invest in larger commercial properties while also deferring capital gains taxes.
The most common reasons for exercising a 1031 Exchange are:
- Exchanging from commercial property which can’t be readily refinanced, such as land, to improved property which will support a new loan. This makes it possible to obtain cash, and trading from non-productive land to improved property can also create improvedcash flow.
- Exchanging from a high-appreciation property (such as a rental house or apartment) to a high-cash-flow property (such as a retail center), or vice-versa, depending on investment objectives.
- Exchanging from a property with high debt service payments into a property with lower payments or lower interest.
- Exchanging for a property that will be easier to sell.
- Exchanging to change your lifestyle. For example, exchanging into a property requiring no management for a property owner wanting to travel or retire.
- Exchanging from several smaller properties to a single larger building to consolidate ownership benefits.
- Exchanging from a larger building to several smaller properties to improve liquidity or to diversify ownership among several persons.
- Exchanging to convert the nature of the investment. For example, exchanging from a rental house or apartment to a small medical building for the doctor who wishes to practice in a building he owns.
- Leases of 30 years or more may be traded for real estate. Sale lease backs have been ruled to be exchanges, if handled properly.