Internal Revenue Code 1031 offers the real estate investor a powerful tax strategy that when properly used enables him to amass wealth. A key advantage of the 1031 exchange is the ability to dispose of an investment property without paying a capital gains or a depreciation recapture tax. The earning power of the deferred taxes works for the benefit of the investor instead of Uncle Sam. The tax not paid can be regarded as an interest free loan from Uncle Sam.
Replacement Properties

Illustrative of this benefit is an investor who sells a property in which he has either a positive equity position or one that is “free and clear” and exchanges into a more valuable property. In the replacement property through additional positive non-recourse leverage the investor increases his cash flow and provides himself with additional depreciation. By executing sequential 1031 exchanges, the investor perpetually defers capital gains and depreciation recapture tax. With the death of the exchanger his heirs receive a one time step up in basis and the deferred tax is never payed. View this Example of four exchanges over twenty years.

Tax deferred exchanges have been in the tax code since 1921. The Starker case initiated in 1967 by J.T. Starker with a "land exchange agreement" and settled on August 24, 1979 by the U.S. Court of Appeals (Ninth Circuit) served for many years as a guide to exchanges. Exchanges were available to investors with expensive lawyers and the fearless. The Final Treasury Regulations of 1991 streamlined the exchange process and defined the role of the Qualified Intermediary. Gone was the thought that you could only exchange a warehouse for another warehouse, an apartment house for another apartment house, etc. Exchanges became a tool for all real estate investors. Today, some 200,000 Form 8824's are filed annually.

Receiving an offer too good to refuse or one approaching your dream price motivates owners to consider selling property held for so many years it has almost become part of them.


Through an exchange instead of an outright sale the seller can achieve the following:

Preserve his equity - and enjoy the income from the dollars not paid to Uncle Sam.
Increase depreciation - by acquiring additional leverage.
Diversify - through the use of the three property identification rule buy three different product types in three different geographic areas.
Management relief - sell a management intensive property, such as a group of single family houses, and exchange into a TIC institutional quality property or an apartment complex with a resident manager.
Estate Plan - Exchange a larger property into several smaller properties so that after the Exchanger’s death each heir will receive a different property and be able to do with it as he or she sees fit.
Increase cash flow - Exchange raw land for income producing real estate.

A lot of people want to keep their lives simple and feel that 1031 exchanges are too complicated. Why not just pay the tax and reinvest the proceeds? The graph shows extra cash flow from capital gains tax dollars at work. There are 761,122 good reasons to exchange! Start early, familiarize yourself with the exchange process, choose an experienced knowledgeable exchange specialist and a good Qualified Intermediary.

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