Many investors utilize the 1031 exchange due to the flexibility it provides in growing or minimizing their portfolio. For example, a homeowner may have several single family rentals in an area where the fair market rents are not yielding the desired return on investment. Maybe the management duties and maintenance upkeep of the properties are also becoming an unwanted hassle. By doing an exchange, the investor can sell these substandard properties and consolidate into a single higher grade property in a different geographic region with the potential to earn a higher return on investment and better routine maintenance expenses. On the other hand, an exchanger can sell one property and expand his portfolio by exchanging into multiple properties.
Example:
Bob, a long time investor, is nearing retirement and wants a solution to relieving the tension of managing 4 different duplexes he bought back in 70’s. The rents are not as good as he initially expected, the units are in need of updating, and he is growing tired of the responsibility of managing these properties. Bob decides to take advantage of a 1031 exchange and consolidates the 4 duplexes into a newly built 10-unit apartment building located in a nicer area with higher market rents. By doing the exchange he is able to roll his equity from the duplexes into the new building which provides a better return on his investment. This allows Bob to hire a management company to relieve him of his stressful landlord duties and affords him more time to plan his retirement.