The Benefits of a 1031 Exchange

The Benefits of a 1031 Exchange

If you are a real estate investor, chances are you have heard of a 1031 exchange. Savvy investors talk about it. Experienced CPAs talk about it. Even the guy down the street knew someone who once looking into it. So what exactly is a 1031 exchange in real estate?

A 1031 exchange refers to the Section 1031 of the Internal Revenue Service’s tax code. Under the tax code, a property owner can conduct a “like-kind exchange” of property without recognizing a gain or loss. In simple terms, an investor can sell an investment property and use the money to buy another investment property without paying taxes on any of the profit.

The fine print

There are a few important details to know before getting too excited about getting to pocket all of the money you made from the sale of a property without paying any of those pesky taxes.

First, the 1031 exchange is only available for investments and specifically real estate property. The code cannot be used for the sale of a primary home, collectibles, goods, or intellectual property. You can still sell those items at a profit—just expect to pay Uncle Sam his portion of that gain.

A 1031 exchange can also only be used to exchange a like-kind property for a like-kind property. This means that you have to use 100% of the profits to buy another investment property. If even one cent enters your own pocket, you now have to pay taxes on the entire profit. This is where a qualified intermediary can help you stay on the right side of the IRS. Your CPA should be able to direct you to the right resource.

The 1031 exchange can be a powerful tool to building investments in real estate but you should always consult with a CPA to determine what will work best for your situation.