A 1031 exchange, also known as a “like-kind exchange,” is a tax-deferral strategy that allows an investor to sell a property, reinvest the proceeds in a new property, and defer paying capital gains taxes on the transaction. The term “gain” in 1031 exchange refers to the profit made on the sale of the property.
Example
Suppose an investor owns a rental property worth $500,000 and sells it for $600,000. The gain on the sale of the property is $100,000. In a 1031 exchange, the investor can defer paying taxes on the $100,000 gain by using the proceeds from the sale to purchase a new investment property within 180 days.
Tips
- Hire a qualified intermediary (QI) to handle the exchange to ensure compliance with IRS rules.
- Make sure the replacement property is of like-kind and equal or greater value.
- Plan to ensure that the new property can be identified and purchased within the 180-day time frame.
Recommendations
- Consult with a tax professional or financial advisor before engaging in a 1031 exchange to understand the potential tax implications.
- Consider the long-term financial goals and the potential benefits of the exchange before making a decision.
- Carefully consider the risks and rewards of a 1031 exchange and its impact on an investor’s financial situation.