1031 Exchanges are a core component of an innovative tax reduction approach. They may allow you to defer gains from the sale of a real property to a more opportune time.
What is a 1031 Exchange?
1031 Exchanges, named after Section 1031 of the US Internal Revenue Code, allows investors to avoid paying capital gains taxes when you sell an investment property and reinvest the proceeds from the sale into a property of like kind. This is a great opportunity to diversify your portfolio by geography, type of investment, and industry while still matching debt-equity requirements.
Tenants, Toilets, and Trash
Real estate is a powerful investment option for many people, but it can get tiring trying to manage multiple investment properties on your own. If you’re tired of dealing with the day-to- day responsibilities of actively managing your properties (aka the tenants, toilets, and trash), a 1031 Exchange into a professionally managed property might make sense for you.
What Qualifies for a 1031?
There are two important qualifications when determining whether or not a property qualifies for a 1031 Exchange.
- Both the relinquished and replacement properties must be held by the exchanger either for investment purposes or for productive use in a trade or business.
- Both properties must also be like-kind, which refers to the nature or character of the property and ignores differences in grade or quality.
Some common examples of qualifying exchanges might include raw land for improved real estate, residential rental properties for other real estate, or a commercial rental property for any other real estate.
Estimating the Tax Savings on a 1031 Exchange
There is a formula that investors can use to estimate the potential capital gain tax owed on the transfer of the property. Always consult with your financial advisor or tax advisor to determine these actual savings. We’re here to help!
