The Benefit of 1031 Exchange

A Section 1031 exchange is one of the few techniques allowable by law to postpone taxes due on the sale of qualifying real property.

A properly structured 1031 exchange allows an investor to sell real property, and reinvest the proceeds in a like-kind new real property; basically, it’s a swap of one real business investment strategy or investment asset for another and a deferral of all taxes, generally capital gains. IRC Section 1031 (a)(1) states the seller has 45 days after closing to identify potential replacement real personal property and a total of 180 days to acquire the replacement property.

These tax savings allow the investor efficient leveraging and upsizing of their investments. 1031 exchanges allow for diversification of assets while deferring tax payments.

WHAT PROPERTY QUALIFIES 1031 EXCHANGE

Under the recently enacted Tax Act, the only real property qualifies for like-kind exchange treatment.

Both the real property you sell and the replacement real property you buy must meet certain requirements.

Both properties must be held for use in a trade or business or investment. Property used primarily for personal use, like a primary residence or a second home or vacation home, does not qualify for a like-kind exchange.

Quality or grade does not matter. Most real estate will be like-kind to other real estate. For example, real property that is improved with a residential rental house is like-kind to vacant land. One exception for real estate is that real property within the United States is not like-kind to intellectual property, real property outside of the United States.

1031 EXCHANGE PROCESS

As noted, 1031 exchanges allow investors to defer capital gain taxes as well as facilitate significant portfolio growth and increased return on investment.

To assess the full potential of these benefits, it is crucial to have a comprehensive knowledge of the exchange process. A 1031 exchange can be tricky, and it is best for investors is to work with a 1031 exchange expert to ensure that you comply with all of the IRS’s requirements.

Taxes saved with a 1031 exchange are considered deferred taxes because you’ll eventually have to pay capital gains taxes if you sell the new property.

You will not have to pay if you don’t sell, or if you use another 1031 exchange.