Internal Revenue Code Section 1031 allows business owners to exchange their real estate that is held for productive use in a trade or business for other like-kind investment or business-use property. No gain or loss will be recognized. Done correctly, business owners can defer their capital gains taxes, depreciation recapture taxes, and alternative minimum taxes (if applicable).
Why would a business owner want to exchange out of his or her current business-use property?
Relocation or Expansion/Downsize of the Business
- Find a better location to serve clients
- Expand the number of locations (sell one location and buy multiple locations)
- Relocate company Headquarters to an updated facility
- Consolidate locations or buy a smaller building that reduces space and cost
Generate More Income
- Exchange business-use property such as an office condo for another type of investment property that generates more income. Consider revenue-producing commercial real estate such as strip centers or office buildings. Click here to learn about the various types of commercial properties that apply for 1031 exchanges.
- Free up cash. After a 1031 exchange has been completed and all of the equity and cash have been reinvested into the new property, consider refinancing the asset.
Exit Strategy for Business Owner
- Retiring business owners can sell their current business-use real estate for a rental home or condo. After the acquisition of the new property, it could be used for a vacation rental. After a few years have passed, the owner can convert the property into their own residence or a second home.
- Reduce management obligations by exchanging into easier-to-manage real estate such as land, triple-net investments, or Delaware Statutory Trusts (DSTs).
- Great tool for estate planning as any 1031 exchange property transfers to your heirs upon your passing at the stepped-up basis and all capital gains and depreciation taxes are forgiven.
For questions or more information regarding 1031 Exchanges for business-use properties, please contact Midland at (239) 333-1031 or visit www.midland1031.com.