1031 TAX DEFERRED EXCHANGE
What is a 1031 Exchange?
The 1031 exchange is a popular strategy among real estate investors that allows them to defer capital gains taxes on the sale of an investment property by reinvesting the funds into another replacement property. For this reason, these exchanges are also referred to as a ‘Like-Kind’ exchange.
Outlined in IRS Code Title 26, Section 1031 (from which the exchange takes its name) the rule basically says that an exchange of one investment property for another similar property will not be recognized as a gain or loss, provided it is used for the purposes of business or trade.
There are a few specific requirements related to the handling of the transaction that must be followed. For example, the sell and subsequent purchase must be done through a qualified intermediary and at no time must the proceeds of the funds come into your hands. Also, there are strict deadlines for when the purchase and sale must occur within. For more on this, you can review EXCHANGE REQUIREMENTS HERE.
With the 1031 Exchange, real estate investors have an opportunity to defer capital gains taxes (which in some cases can a significant 30% to 40%) indefinitely if they continue to reinvest the capital back into other investment properties.