1031 tax-deferred exchange
What is a 1031 exchange?
A 1031 Tax-Deferred Exchange is a process that can happen when an owner of an investment property wishes to not only sell said investment property, but replace it with another. If another “like” property is purchased within a given amount of time, it’s considered an “exchange” of the property, allowing the owner to defer payment of capital gains tax on the sale.
Why use a 1031 Exchange?
Property values are currently at an all-time high, and ever since capital gain tax rates were increased, turnover in ownership of income/investment properties has slowed dramatically. Unlike personal residences, income/investment properties do NOT have automatic gain amounts that can be received tax free, meaning profit generated from the sale of these properties is taxed at the taxpayer’s full tax rate as capital gains income. As a solution, Section 1031 of the Internal Revenue Code allows for the deferral of capital gains taxes on income/investment property exchanged for other income/investment property
What to know
The IRS has specific requirements that must be satisfied in order to effectuate a successful exchange. Those requirements include:
· To qualify, the replacement property must be considered a “like-kind” property, or property similar to that which is being exchanged.
· Replacement property should be of equal or greater value to the one being sold.
· Replacement property must be purchased within 180 days
Remember that primary residences are NOT eligible for a 1031 Exchange. Only income/investment properties may be exchanged.