What Is a 1031 Exchange?

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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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