What is a 1031 Exchange?

Let’s get technical shall we? There are so many aspects of real estate that I learn about daily and wonder how it wasn’t a mandatory class in high school or even college. It can be such a vital part of how we build wealth over the course of our lives, but somehow it is often overlooked for years and years of exams on photosynthesis and Geometry. So what is a 1031 exchange you may ask, and why is it more important than finding the acute angle on a triangle? Let’s dive in.

A 1031 Exchange is a vital part of real estate investing. In it’s most basic definition, it allows you to sell an investment property and reinvest the proceeds from the sale within a certain time limit in a property or properties of like kind and equal or greater value. Keep in mind, this only works for investment properties, not your primary residence. So let’s say you have a vacation home that you are looking to sell. Rather than selling that ski condo and getting taxed on the capital gains of that home, you can simply roll those funds over into your next vacation home, saving you thousands of dollars in tax money.

Typically when you sell a property, you are taxed on the sale of it. But by meeting the 1031 requirements, you can defer the tax owed on that property so that no tax is due at time of the sale. So how do you meet those requirements? To receive the full benefit of a 1031 exchange, your replacement property should be of equal or greater value. You must identify a replacement property for the assets sold within 45 days and then conclude the exchange within 180 days.

According section 1031 in the IRS code (yes, thats where it got it’s name) it states that any proceeds received from the sale of a property are taxable. Thats why in this exhange, the funds are sent to a qualified intermediary rather than the seller of the property to hold the funds. The main benefit of doing this is in fact the tax deferral. And there is no limit on how may times you can do this exchange. You could continue to defer captial gains tax as much as you want, all while saving you hundred of thousands of dollars over the course of your real estate investing career.

There are so many different angles to approach a 1031 exchange, so be sure to consult with a Tax Advisor or CPA. I just gave you some of the basics to plant the seed in your mind in case you have interest in purchasing investment properties.

If you are interested in building your wealth through investment properties, give me a shout.