What is a 1031 Exchange?

A 1031 exchange is the exchange of funds from one investment property to another. This allows for capitol gains tax to be deferred. 1031 exchanges are regulated by the IRS and have several limits such as the type of property purchased, and time constraints on buying and closing on the property.

What are the benefits to a 1031 exchange?

• Tax Deferral: The most immediate benefit is the ability to defer paying capital gains taxes on the sale of an investment property, as long as the proceeds are reinvested in a like-kind property.

• Upgrade your Investments: By deferring taxes, investors have more capital available to invest in another property, potentially leading to higher returns and increased cash flow.

• Portfolio Diversification: Investors can diversify their investment portfolios by exchanging one type of property for another, such as trading an apartment building for a retail space or raw land.

• Continual Growth: There is no limit on how many times an investor can perform a 1031 exchange, allowing for the continual growth of investments on a tax-deferred basis.
  

What are the different types of 1031 exchange?

• Delayed Exchange [Most Common]: Property is sold and then a replacement property is acquired.

• Simultaneous Exchange: Relinquished and replacement properties are exchanged at the same time.

• Reverse Exchange: Replacement property is purchased before the relinquished property is sold.

• Improvement or Construction Exchange: Investors makes improvements on the replacement property using the exchange funds.

What are 1031 exchange requirements?

• Like-Kind Property: The properties involved must be of similar nature or character, though not necessarily of the same grade or quality.

• Investment or Business Property Only: The exchange must involve property held for investment or used in a business. Personal residences are excluded.

• Greater or Equal Value: The replacement property should be of equal or greater value to defer all the capital gains taxes.

• Same Taxpayer: The tax return and title for the property must remain in the same taxpayer’s name before and after the exchange.

• No “Boot” Received: “Boot” is any form of non-like-kind property received in the exchange, such as cash or relief from debt. Receiving boot can trigger tax liabilities.

• Reinvest All Equity: All equity from the relinquished property must be reinvested into the replacement property to defer all capital gains taxes.

• Arm’s Length Transactions: The exchange must be between parties who are acting in their own self-interest and are not related, to ensure the transaction is conducted fairly and at market value.