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Investor/Taxpayers Have Choices

Investors/Taxpayers have several choices available when they consider their position with regard to continued ownership of their investment or trade/business property. They may:

1. Do a Section 1031 exchange. Exchange into a more expensive property, no debt relief, no cash out. Take their old basis with them thereby deferring recognition of that gain until a later date.

2. Borrow against their built up equity. Use the net loan proceeds to acquire more property or take a trip to Hawaii.

If they go to Hawaii - No significant change in their basis, no recognized gain. Higher debt requires greater loan service, but it is deductible.

If they reinvest loan proceeds in another property – As above, no taxable event. Have to maintain two new loans; one on old property, one on new property. They get additional depreciation from the newer property and end up with about the same net equity as if they had done a 1031 exchange.

3. Sell for cash (or fail to do a 1031 exchange correctly): Pay taxes on the recognized gain. Use the proceeds to acquire more property (with higher basis to depreciate). They will end up with about 35-38 percent less cash or equity (due to state and Federal taxes) than in the prior cases.

4. Do Nothing! Enjoy their positive cash flow. Have slightly less depreciation than in the above cases. Keep their lower property taxes. Don't increase your debt load. Go to Hawaii, economy class, every year.