Make the Exchange
Using 1031 Exchanges to Diversify Your Real Estate
Portfolio or Plan Your Estate
Most Real Estate Pros think of 1031 exchanges only one way - as a method for delaying the capital-gains
tax on the sale of an investment property by transferring the equity to a like property. In fact, there are two additional
applications for 1031 exchanges that can provide tremendous benefit. They can be used as tax free vehicles for adjusting or
diversifying real estate portfolios and as estate planning tools.
With today's high property values, low interest
rates, low capitalization rates and great available terms, now is the time to talk about evaluating your financial goals,
needs and options.
Using 1031 exchanges to diversify
or adjust a portfolio can be very beneficial for numerous reasons. If you or someone you know is in one or more of the following
situations then perhaps is time to make some changes.
Geographically clustered portfolio
: We know what happened after Hurricane Katrina, not to mention the 1992 riots in Los Angeles and various U.S earthquakes.
If your properties are clustered in one geographic area, there's a real risk that the entire portfolio could be wiped
out with one region-wide disaster. Spreading properties out could be of great benefit.
property type : Many real estate investors make the economically risky decision to put all of their money in one
property type. Instead, they could use a 1031 exchange to sell some of the portfolio and diversify into other property types
(such as retail, office, industrial, multifamily or mixed use). The result will be a portfolio that can absorb a variety of
economic conditions or changes.
No upside potential : Many properties are fully
developed with little upside other than rent increases. But if you have the sophistication or a management team to handle
more complicated transactions, then you could exchange into properties that has an upside potential (such as a retail center
that has excess parking on which a restaurant pad can be added).
Tied up equity:
In recent years, many markets have seen a big run-up in property values. Chances are, many investors have a lot of equity
locked in their holdings. With today's rates and terms, as part of a 1031-exchange portfolio adjustment plan, it might
make sense to refinance all or some of the properties, placing the highest debt and best rates on specific properties while
freeing up equity from the rest.
With today's high values, it is possible that some of you may
decide now is the time to sell , pay the taxes and walk away with the profits. But if you decide to stay in the Real Estate
market, perhaps this is the right time to develop a 1031 exchange adjustment plan. Having the proper perspective about your
risk preferences, goals and timelines
can be the estate planning tool you were looking for.