A 1031 Like-Kind Exchange (also called a 1031 exchange) is a tax-deferral strategy that allows real estate investors to defer capital gains taxes when selling an investment property by reinvesting the proceeds into another like-kind property. It’s named after Section 1031 of the IRS tax code.
Key Benefits of a 1031 Exchange:
✔ Defers Capital Gains Taxes – No immediate tax liability on profits from the sale.
✔ Allows Property Portfolio Growth – Reinvest full proceeds into a higher-value asset.
✔ Preserves Cash Flow – More capital available for reinvestment.
✔ Wealth Building Strategy – Investors can repeatedly exchange properties and defer taxes indefinitely.
Basic Rules for a 1031 Exchange:
Like-Kind Requirement – The new property must be of the same nature as the old one (e.g., investment real estate for investment real estate).
Timeline Rules:
45-Day Identification Rule – You must identify potential replacement properties within 45 days of selling the original property.
180-Day Closing Rule – The new property purchase must be completed within 180 days of the original sale.
Use of a Qualified Intermediary (QI) – The IRS requires a third-party intermediary to hold the sale proceeds until the new property is acquired.
Reinvestment of Full Proceeds – To fully defer capital gains taxes, all proceeds from the sale must go into the new property.
Equal or Greater Value Rule – The new property must be of equal or greater value to the one being sold to avoid taxable gain.
Types of 1031 Exchanges:
Delayed Exchange (most common) – Sell first, then buy a replacement property within 180 days.
Reverse Exchange – Buy a new property before selling the old one.
Simultaneous Exchange – Both transactions close on the same day.
Improvement Exchange – Use part of the sale proceeds to renovate the replacement property.
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