IRC Section 1031 Tax Deferred Exchange

What is a 1031 Exchange?

An Internal Revenue Code (IRC) Section 1031 tax deferred exchange allows investors to exchange like-kind property for another and in the process defer payment of federal capital gains taxes.  Simply put, investors are able to utilize the money they would have paid in capital gains taxes and reinvest it in the purchase of another investment property. 

Why Exchange?

Selling an investment property without a tax deferred exchange can result in payment of up to 28% of the gain in federal and state taxes.  In contrast, an exchange preserves an investor's net proceeds.  You can use the proceeds and reinvest the money instead of owing a significant portion of your profits in taxes.  If done correctly, this process is an excellent way to build wealth.  Every dollar you save in taxes allows you to increase the value of your investment portfolio through the purchase of real estate worth many times your initial investment.

Exchange Guidelines

• Discuss the exchange with your tax advisor.
• Contact a qualified intermediary to facilitate the exchange process upon opening escrow for the relinquished property.
• Exchange like-kind investment property.
• Identify replacement property within 45 days from the close of the relinquished property.
• Complete the acquisition of the replacement property within 180 days (or your tax return filing date, whichever is earlier) from the close of the relinquished property.

This information is not to be interpreted as tax or legal advice.  Consult with your tax advisor regarding your unique situation and determine whether or not a 1031 exchange is advantageous for your circumstances.