Tax Deferral in 1031 exchange refers to the process of deferring payment of capital gains tax on the sale of an investment property. It is achieved through a tax code section 1031 exchange, also known as a like-kind exchange.
Suppose you own a rental property that you have held for several years and have decided to sell. If you sell the property, you will owe capital gains tax on the profit you made from the sale. However, if you engage in a 1031 exchange, you can defer paying the capital gains tax until you sell the replacement property.
- Ensure that the property you are selling and the replacement property meet the requirements of a 1031 exchange.
- Choose a qualified intermediary to handle the exchange process.
- Complete the exchange within the specified time frame.
Consult a tax professional to ensure that you understand the requirements and benefits of a 1031 exchange.
- Keep accurate records of all transactions related to the exchange.
- Have a clear understanding of your goals and objectives for the exchange.
- Consider the potential tax implications of the exchange before making a decision.