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What’s a 1031 exchange?

You’ve heard the phrase “1031 exchange” before, but you still aren’t sure what it means. If you’re thinking about dipping into the world of real estate investment, however, it’s smart to have a better understanding of this common process.

Knowing more can also help you avoid unnecessary tax liabilities and legal complications.

It’s a reference to IRS Section 1031

The phrase comes from the section of the Internal Revenue Service’s code that controls how one investment property can be swapped with another while deferring any capital gains taxes that might otherwise come into play.

For 1031 exchanges, all are controlled by certain time frames and the nature of the property involved. They can only be used with investment properties (although former primary residences can become investment properties in limited situations). Done right, there’s no real limit on how often you can execute a 1031 exchange.

The chief advantage of a 1031 exchange is that it lets you avoid cashing out one property just to invest in another and subjecting yourself to immediate capital gains taxes. Your investment can then continue to quietly accrue until you eventually decide to divest yourself — at which point your taxes may actually be lower.

It’s a smart strategy for investment property, but complex

The exact rules involved in a 1031 exchange are quite complicated. The laws have also changed fairly recently (2017) and could change again without warning.

For those reasons alone, it’s wise to work with an experienced attorney, particularly when you are trying to decide between simultaneous exchanges, delayed exchanges or reverse exchanges. Please continue to review our website to learn more about your options.