1031 TAX EXCHANGE BASICS: Deferring Capital Gains Taxes

The 1031 Tax Exchange is a popular strategy used by real estate investors to defer capital gains taxes on the sale of an investment property. This is achieved by reinvesting the proceeds from the sale into another like-kind replacement property. Therefore, these exchanges are also known as “Like-Kind” exchanges.

As outlined in IRS Code Title 26, Section 1031 (the source of the 1031 Tax Exchange name), an exchange of one investment property for another similar property used for business or trade purposes will not trigger a taxable gain or loss.

However, specific requirements govern the handling of a 1031 Tax Exchange transaction. For example, the sale and subsequent purchase must be facilitated by a qualified intermediary, and the seller cannot receive the sale proceeds directly at any point. Additionally, strict deadlines dictate the timeframe within which the purchase and sale must occur.

Through the 1031 Tax Exchange, real estate investors have the opportunity to defer capital gains taxes (which can reach a significant 30% to 40% in some cases) indefinitely, as long as they continue to reinvest the capital into other like-kind investment properties.

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