What's a 1031 Exchange?

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A 1031 exchange, also known as a like-kind exchange, is a tax-deferral strategy used in real estate. It allows investors to sell a property and use the proceeds to purchase another similar property (called "like-kind" property) without paying capital gains taxes on the profit from the sale at the time of the transaction.

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Here's how it works:

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1. Sell the Property: You sell a property that has appreciated in value.

2. Identify a Replacement Property: You must identify a replacement property (or properties) that are similar in nature or use, within 45 days of the sale.

3. Close on the Replacement Property: You must close on the new property within 180 days of the sale of the original property.

4. No Capital Gains Taxes: The capital gains taxes are deferred until you sell the replacement property in the future, allowing the investor to reinvest the proceeds without the immediate tax liability.

 

Key Points:

• The properties involved must be "like-kind," but they don't need to be identical. For example, you can exchange a commercial property for residential rental property.

• The exchange must be structured through a qualified intermediary who holds the proceeds of the sale until the replacement property is purchased.

 

A 1031 exchange can be a powerful tool for real estate investors to defer taxes and grow their investments over time, but it has specific rules and timelines that need to be followed.