WHAT IS A 1031 EXCHANGE?

A 1031 exchange, also known as a “Like-Kind Exchange”, is a tax strategy that allows investors to defer paying capital gains taxes on the sale of a property by using the proceeds from the sale to purchase a similar property. The name “1031” comes from the specific section of the Internal Revenue Code that governs these types of exchanges.

In order to qualify for a 1031 exchange, the property being sold (relinquished property) and the property being purchased (replacement property) must both be used for business or investment purposes. Additionally, the properties must be “like-kind”, which means that they must be of a similar nature, character, or class.

The process for a 1031 exchange involves transferring the proceeds from the sale of the relinquished property to a qualified intermediary who holds the funds until the replacement property is identified and purchased. The investor has 45 days from the sale of the relinquished property to identify potential replacement properties and 180 days from the sale to complete the purchase of a replacement property.

One of the benefits of a 1031 exchange is that it allows investors to defer paying capital gains taxes on the sale of a property. Instead, they can roll over the gain into the replacement property and only pay taxes when they eventually sell the replacement property. This can be a powerful tax-saving strategy for investors who are looking to grow their real estate portfolio without incurring significant tax liabilities.

In summary, a 1031 exchange is a tax strategy that allows investors to defer paying capital gains taxes on the sale of a property by using the proceeds from the sale to purchase a similar property. This is done by transferring the proceeds to a qualified intermediary who holds the funds until the replacement property is identified and purchased. This can be a powerful tax-saving strategy for real estate investors looking to grow their portfolio without incurring significant tax liabilities.