In a 1031 exchange, investors are able to defer paying capital gains taxes on the sale of their property by reinvesting the proceeds into a replacement property. The tax deferral provided by a 1031 exchange is limited to capital gains taxes and does not apply to income taxes.
Key-Takeaway
- A 1031 exchange only defers capital gains taxes, not income taxes.
- Investors must still pay any income taxes on rental income received from the replacement property in a 1031 exchange.
Example
Suppose an investor sells a rental property in a 1031 exchange and purchases a replacement property. The investor must still pay any income taxes on any rental income received from the replacement property, even though they are deferring capital gains taxes.
Tips
- Work with a qualified intermediary or other professional to assist in the 1031 exchange process, including the identification of replacement property and the planning and execution of the exchange.
- Consider the potential tax implications of a 1031 exchange, including the impact on income taxes.
Recommendations
- Consider the potential impact of the 1031 exchange on income taxes, and seek advice from a tax professional as needed.
- Consider alternative investment strategies if the potential impact on income taxes is significant.
- Work with a qualified intermediary or other professional to assist in the 1031 exchange process.