What is a 1031 Exchange?

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In simple terms: a 1031 Exchange allows an Investor to sell an investment property and roll the proceeds into the purchase of a new investment property to defer all capital gains taxes. By utilizing the money that an investor would otherwise pay to the IRS in taxes, the investor can now add it to a down payment and acquire a more valuable investment property.

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What Does a 1031 Exchange Protect?

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A 1031 Exchange strategy allows an investor to 'defer' paying any capital gains taxes on an investment property when it sells, but only if purchasing a new like-kind property with the profit gained from the sale of the first property. This 'tax-deferred like-kind' exchange is what the 1954 Amendment tax code referred to when it was modified.

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Is a 1031 Exchange Right for You?

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You might ask yourself what type of property fits a 1031 Exchange. In terms of real estate, you can exchange almost any type of property as long as it is NOT your personal residence. Here are some of the guidelines for what is allowed within the United States. The property purchased must:

1. Be a Like-Kind Property

2. Be an Investment or Business Property Only

3. Be of Greater or Equal Value than the Sold Property

4. Be Exchanged for a lesser value property (but that won’t be 100% tax-free)

5. Be Purchased using the same name on the property sold as purchased

6. Be identified in 45 days (known as the 45-Day Identification Window)

7. Be purchased in the 180-Day Purchase Window.

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