Possible Benefits 

The main reason that investors consider the 1031 exchange is the potential to defer capital gains taxes for as long as possible for as long as they reinvest the proceeds of any sale into another investment property.

In addition to the tax savings, compared to other investment vehicles the ability to reinvest the money that you’d otherwise lose to capital gains tax means there is potential for more cash flow from those original investment proceeds. For example, if an investment property of $1,000,000 was sold and the capital gains tax due was $400,000, this means the investor would have $600,000 remaining and might choose to put it into the stock market. With a 5% return each year that would provide $20,000 annually. However, if the original investment property was exchanged for another investment property with the same 5% return as the stock market might afford, the difference is that this investor would have a larger portion of the original investment amount to put in so that 5% would represent an amount much greater at $50,000.

The possibility of asset accumulation in which more or larger properties are acquired during each subsequent 1031 exchange is another benefit of this arrangement. From an estate planning point of view, this may be beneficial to those inheriting the investment property as the deferred taxes may instead be assessed with a STEP-UP in basis allowing the new owner to be assessed at current rates rather than the deferred rates.