What is the 1031 Exchange?

The exchange rule allows for the deferment of capital gains on investment properties if you “exchange” one property for another.

1031 Breakdown: 

1.       Both properties must be used for the same purpose – any 2 investment or business properties could be considered ‘like-kind’ “even if they differ in quality or grade.”

2.       The properties being bought and sold must be in the same person’s name.

3.       You can sell your home for another personal residence but not to purchase a different type of building for a business such as a warehouse in exchange for your home.

4.       To qualify for 100% tax deferment, the new purchase must be equal to or greater in value than the one being sold.

5.       You have a time constraint! You have 45 days to choose 3 replacement properties that are qualifying like-kind exchange candidates. To get the 100% tax deferment, the exchange must be completed within 180 days.

You can exchange properties from one location to a more desirable or up-coming area to get better returns for your next exchange. There is NO LIMIT for how many exchanges you can do and this is an optimal way to shift your investment capital to maximize returns.

If you’re looking to DOWNSIZE you can also benefit from the 1031 Exchange.

You only pay capital gains on the difference between the property sold and the property purchased. For example, if you sell your home for 1,000,000 and buy a new home at 775,000 you only pay the capital gains on the 225,000 and defer the tax on 775,000.

You can qualify to do a 1031 exchange if you are an:

Individual

C Corp

S Corp

Partnership (general/limited)

LLC

Trust

Any tax paying entity

 

If you want more specific details, click here for IRS Code 1031. https://www.irs.gov/businesses/small-businesses-self-employed/like-kind-exchanges-real-estate-tax-tips