An Asset in a 1031 exchange refers to the property being exchanged. The 1031 exchange, also known as a “like-kind exchange,” allows investors to defer paying capital gains taxes on the sale of an asset as long as they use the proceeds to purchase a “like-kind” asset within a certain timeframe.
Key-Takeaway
- An asset in a 1031 exchange refers to the property being exchanged.
- The asset must be of “like-kind” and held for investment or used in a trade or business.
- The asset must be identified within 45 days, and the exchange must be completed within 180 days.
- The asset can be exchanged for multiple properties, but the total value of the properties received cannot be more than the total value of the property sold.
Example
An investor named Tom owns a rental property that he wants to sell. Instead of paying capital gains taxes on the sale, Tom completes a 1031 exchange. He sells his rental property and uses the proceeds to purchase a new investment property within the required timeframe. Because Tom has completed a 1031 exchange, he is able to defer paying capital gains taxes on the sale of his original property.
Advice
- Understand the rules and regulations of the 1031 exchange.
- Identify the asset to be exchanged within 45 days
- Complete the exchange within 180 days
- Consider the asset’s value to be received; it should not be more than the value of the property sold.
Recommendations
- Consider the overall diversification of your investment portfolio
- Be aware of the fees and costs associated with the exchange process
- Be prepared for the possibility of the new equity investment not performing as expected