What Is a 1031 Exchange?

When you sell your real property, you can expect to pay capital gains tax on the gain, and ordinary income tax for the depreciation taken during your ownership.

How does a 1031 exchange work? | www.deductingtherightway.com

So, how do you avoid paying tax? One of the most common tools that real estate investors take advantage of is a tax-deferred exchange using code section 1031 (like-kind exchange).

The Rules of a 1031 Exchange

The transaction involves a specific set of rules and timeframes.
  • You must exchange the original property for another piece of real property
  • You need to identify the replacement property and complete the sale within a specified period
  • You must use a qualified intermediary to handle the funds from the first property and for the acquisition of the new property
  • You must continue to use the replacement property for your trade, business, or for investment

Benefits of a 1031 Exchange

If you meet all the strict requirements of the 1031 exchange rules, you can freeze the taxes typically triggered from the sale of a property.
...you can freeze the taxes typically triggered from the sale of a property.
Once you sell the replacement property, the taxes are due.

TIP: You can prolong the taxes indefinitely by continually entering a 1031 exchange and selling the replacement property for another one.

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DISCLAIMER: Please consult with your accountant, attorney and financial advisor before implementing any tips displayed on this website. DIY research does not replace the advice of a licensed professional who has thoroughly reviewed your file.