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Key Benefits of a 1031 Exchange

Key Benefits Of A 1031 Exchange


1. Potential to defer taxes indefinitely: One of the biggest benefits of a 1031 exchange (or like-kind exchange) is the potential to defer tax indefinitely, assuming the 1031 exchange rules are followed with each subsequent exchange. An investment made into a qualified opportunity fund (QOF) also has the benefit of deferring taxes; however, that deferral lasts until 2026 at which point taxes on the invested gain (subject to reductions based on time of investment) are due at the prevailing capital gains tax rate for the 2026 tax year.


2. Estate planning: There are significant estate planning benefits of 1031 exchanges compared to investments made in a QOF. Should a 1031 exchange investor die, heirs immediately receive a stepped-up basis to the market value of the asset(s). This potentially positions the estate to sell the asset and eliminate tax liabilities up to the estate tax exception. Investments made into a QOF, on the other hand, do not receive a stepped-up basis at death. The recipient of the QOF interest has the obligation to pay the deferred taxes in 2026 (or earlier if the recipient disposes of the QOF interest prior to 2026). However, it is not all bad for the recipient since the recipient receives the 10-year benefit of the investment. In other words, if the recipient holds the interest in the QOF for at least 10 years from the original investment, the original investment made into the QOF grows tax-free.


3. Location flexibility: Unlike a qualified opportunity zone investment, the 1031 exchange can occur anywhere within the United States border. This gives the 1031 exchange investor flexibility to invest in any location within any market. A QOF does not have that flexibility. A QOF must invest in property that is substantially located within one of the designated opportunity zones as determined by each state and U.S. territory.




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