What is A 1031 Exchange?
Savvy investors will use 1031 exchanges to build wealth by deferring capital gains. The main benefit of a 1031 exchange rather than simply selling one property and buying another is because of the tax deferral. The term gets its
name from IRS code “Section 1031” and is an exchange of one investment asset for another. The 1031 exchange is bandied by a variety of entities: title companies, realtors, investors, and even the average neighborhood mom.
If you own an investment property and want to sell it to then buy another property, the 1031 exchange helps you avoid paying capital gains taxes. The exchange allows the owner of said investment property to reinvest proceeds from the sale within certain time limits. Sellers are able to reinvest in properties of like
kind and equal or greater value.
Proceeds from this type of sale have to be transferred to a qualified intermediary, rather than the seller of the property. When exchanging property, no cash can be received. If any cash is dealt as a result of the sale, it becomes taxable. That’s why a qualified intermediary company (or person) needs to facilitate the 1031 exchange. This intermediary can have no other formal relationship with the parties who are exchanging the property. Once the seller purchases a replacement property, the qualified intermediary can transfer the funds.
A 1031 exchange can require a high minimum investment plus holding time. These types of transactions are more attractive for parties with a high net worth. 1031 exchanges are complex and need professional support in order to conduct successfully.