1031 Exchange

What is a 1031 Exchange?

A 1031 tax deferred exchange is a type of real estate transaction defined in the Internal Revenue Code (Section 1031).

A 1031 tax deferred exchange allows an investor to dispose of one investment property, use all of the equity to acquire a different investment property, defer the payment of capital gains, and leverage all of the equity from the original property into the replacement property. The process can be complex and you should consult with your CPA. Call us today for more information regarding 1031 exchanges.

Opportunity: For a long-term real estate investor, it is possible to: 1. sell a rental property; 2. at closing have the sale proceeds assigned to and held by an exchange facilitator; then 3. use those proceeds to acquire like-kind replacement investment property that is of equal or greater value and has equal or greater debt.

Benefit: If done exactly by the Sec. 1031 rules, the investor will pay no capital gains taxes on that sale. The investor gets to keep and use the entire net sale proceeds to buy the replacement property.

Advantage to Exchanger: 1. By legally deferring the payment of capital gains taxes, more money is available to the replacement property. 2. Buy more property or have less debt; and, 3. You get to select the time in the future when you would prefer to pay the capital gains tax.

Concern: The Sec. 1031 rules are very specific and unforgiving if you make an error. Recommendation: Consult with a CPA who specializes in real estate or a tax attorney. Also consult with a very experienced commercial – investment real estate broker on the more specific procedures to be taken to avoid what could be a very costly tax issue.