1031 Exchanges explained. It can be a great real estate tax deferment strategy.

Lance Hulsey  |  February 28, 2023

1031 Exchanges explained. It can be a great real estate tax deferment strategy.

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 reinvesting the proceeds from the sale into a new property.

To qualify for a 1031 exchange, the properties involved must be used for business or investment purposes, and must be of "like-kind," meaning they must be similar enough in nature or character. For example, an investor can exchange a rental property for another rental property, or a piece of raw land for a developed parcel.

The process of a 1031 exchange is fairly straightforward: the investor identifies a new property to purchase within 45 days of selling the original property, and closes on the new property within 180 days of selling the original property. The investor must also use a qualified intermediary (QI) to handle the exchange, as the QI holds the proceeds from the sale of the original property and uses them to purchase the new property on behalf of the investor.

One important thing to note is that 1031 exchanges are not available for personal property, only real property.

Another important thing to note is that 1031 exchange does not eliminate the tax liability, it only defers it. The investor will have to pay the capital gains tax at some point, either when the replacement property is sold or when the investor dies.

1031 exchanges are a powerful tool for real estate investors looking to grow their portfolios, as they allow them to defer taxes and use the proceeds from the sale of one property to purchase another, potentially more valuable property. However, it is important to work with a qualified intermediary and consult with a tax professional to ensure compliance with all the rules and regulations involved in a 1031 exchange.

Make sure you consult with a tax professional before participating in any investment strategy. Real Estate Agents are not qualified to give tax advice but can help in the process of identifying new property and transacting in the sale of that property. Give us a call for more information or if you are ready to start the process.

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