What is a 1031 Exchange?
A 1031 exchange, named after Section 1031 of the Internal Revenue Code (IRC), is a tax-deferred exchange that allows an investor to sell a property and reinvest the proceeds into a similar "like-kind" property without immediately recognizing capital gains taxes.
This provision is primarily used in real estate transactions, although it can apply to other types of assets as well.
Here's how it works:
Sale of Property: The investor sells a property (referred to as the relinquished property).
Identification of Replacement Property: Within strict time frames set by the IRS, typically 45 days after the sale of the relinquished property, the investor must identify potential replacement properties.
Acquisition of Replacement Property: The investor must then acquire one or more replacement properties within 180 days of selling the relinquished property. The value of the replacement property must be equal to or greater than the value of the relinquished property to defer the entire capital gains tax.
Tax Deferral: By completing the exchange within the guidelines set by the IRS, the investor can defer paying capital gains tax on the sale of the relinquished property. The tax liability is deferred until the investor sells the replacement property without executing another 1031 exchange.
It's important to note that there are strict rules and regulations governing 1031 exchanges, and investors often seek the assistance of qualified intermediaries or tax professionals to ensure compliance.
Additionally, not all properties qualify for a 1031 exchange, and certain types of properties, such as primary residences or inventory held for sale, are excluded from this provision.
Interested in learning more so you can make your next real estate move? Contact the Fox Team for a complimentary strategy consultation!
