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What is a 1031 Exchange?

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Like Kind Exchanges, also known as tax deferred exchanges, are defined by Internal Revenue Code (IRC) section 1031.

A 1031 Tax Deferred Exchange offers taxpayers the opportunity to build wealth and save taxes. By completing a 1031 Exchange, the Taxpayer can dispose of investment properties, acquire replacement property, and defer the tax that would ordinarily be due upon the sale.

This permits taxpayer to exchange business use or investment assets for other like-kind business use or investment assets without recognizing taxable gain on the sale of the old assets. The taxes which otherwise would have been due from the sale are thus deferred.

A 1031 Exchange allows investors to defer Federal capital gains tax, state ordinary income tax, net investment income tax, and depreciation recapture on the sale of Investment property if certain criteria are met including:

  • Buy replacement property for equal or greater than sold for and reinvest all proceeds
  • Identify replacement property within 45 days of close of sale
  • Purchase replacement property within 180 days of close of sale
  • Must Sell and Buy property that is considered “like-kind” to each other

Meaning if the asset you sold was real estate, your LIKE-KIND buy must also be real estate. You cannot jump from real estate to gold or stocks. However, you can go from a multifamily property to a hotel, or from an industrial property to an office building. It is all real estate; therefore, it is a LIKE-KIND exchange.

  • Process must be handled by a Qualified Intermediary (QI)

Reasons to Exchange

There are many reasons to exchange, such as:

  • Defer Taxes: Federal, State & Depreciation Recapture
  • Diversify or Consolidate a Real Estate Portfolio
  • Increase Cash Flow
  • Switch Property Types (Land, Industrial, Multi-Family, Office, Retail, Residential, Easements)
  • Get Into Other Real Estate Markets (Exchange anywhere within the U.S. & Territories)
  • Build & Preserve Wealth
  • Set up Heirs for the Future (Estate Planning: Stepped Up Basis)
  • Increase Purchasing Power 

Don’t hesitate to contact us to get started on your real estate investing journey, and don’t forget the highest form of a compliment is a referral!

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