The primary advantage of a tax deferred exchange is that the taxpayer may dispose of property without incurring any immediate tax liability. This allows the taxpayer to have more overall investing power by deferring taxes and therefore enabling greater leverage, as opposed to paying the tax liability.

Often the capital gain taxes are deferred indefinitely because many investors continue to exchange from one property to the next, increasing the value of their real estate investments with each exchange. In addition, the tax liability is forgiven upon the death of the taxpayer, which means that the taxpayer’s heirs receive a stepped up basis on such inherited property. That is to say their basis becomes the fair market value of the inherited property at the time of the taxpayer’s death.

Before deciding whether or not to engage in an exchange, the taxpayer should carefully analyze all of his or her options. Additional benefits include:

• Consolidate or diversify investments
• Eliminate management problems
• Increase cash flow
• Relocate business investments
• Greater appreciation through leverage
• Estate Planning

The taxpayer should also consider the disadvantages of a tax deferred exchange. This includes a transferred basis in the newly acquired property, as well as additional transactional costs of completing an exchange. Another disadvantage is that the taxpayer may not personally accept any of the proceeds from the sale of the relinquished property or they may incur tax consequences.

Before deciding whether or not to engage in an exchange, the taxpayer should carefully analyze all of his or her options. Once all of the factors have been considered, a taxpayer may, or may not, decide to engage in a tax deferred exchange.