It is the simple strategy of selling one investment property and rolling over the capital gain or profit into a new investment property. Because of this transaction, it avoids any taxes the seller would have had to pay due to the sale of the property from the capital gains.
It’s not quite just the simple fact of exchanging one property for another but it is the selling of one investment or rental property out right and then you typically have anywhere from 45 to 180 days to invest that profit into a new investment or rental property without being penalized for any capital gains taxes. (Exchange periods may vary by state)
Internal Revenue Code Section 1031
Located under the Internal Revenue Code Section 1031, this is where the 1031 tax exchange gets its name. It’s also referred to as like-kind exchange or tax-deferred exchange meaning your deferring the tax on the sale of one property by rolling it into another.
Are There Restrictions and Rules to the 1031 Exchange?
Yes. A property can only qualify for this type of deferred tax exchange if it follows the US tax code and treasury regulations. This means that the properties involved must be like-kind or similar and both properties must be held for the same investment purpose and offer the same type of property descriptions.
Also, the replacement property must be an equal or greater level of debt then the property sold. If this is not the case you may be forced to pay the tax on the amount of decrease or add in additional cash to offset the lower debt amount.
Do I have to Real a Real Estate Agent or Broker for this Exchange?
Yes. You’ll need to use the resources and authority of a 1031 tax exchange mediator to conduct the purchase and sale properly. The documents and contracts need to be filed with the proper tax authorities so that you are guaranteed the tax-deferred exchange.
We have over 25 years’ experience in this type of tax exchange process. We are a nationally recognized broker in several exchange organizations throughout the United States. Contact us for more information on setting up this type of transfer.