Aug 6, 2023
Grant Murphy
This blog post aims to shed light on the critical topic of 1031 tax-deferred exchanges, particularly for beginners entering the world of real estate investment. So, let's dive in!
What is a 1031 Exchange?
In layman's terms, a 1031 exchange allows you as an investor to defer paying capital gains taxes on an investment property when it is sold. The catch here? You have to reinvest the profits into another similar kind of property. The term '1031 Exchange' is derived from Section 1031 of the U.S. Internal Revenue Code from which it originates.
How does it work?
These exchanges concern 'Like-Kind' properties. This term implies that the property you sell and the one you buy should be similar in nature and usage. For example, you could exchange an apartment building for a mall; both are investment properties.
Benefits of 1031 Exchange
Undoubtedly, the major advantage is tax deferral; however, it's not the only one.
Build Your Portfolio: Provides an opportunity to shift your investments across various property types or locations without the burden of a tax liability.
Save on Taxes Now: Allows immediate deferment of federal & state capital gains taxes and depreciation recapture.
Cash Flow Increase: By reinvesting your profits, you can acquire a property that generates higher income.
Common Misconceptions
Like any tax regulation, 1031 exchanges come with their own set of intricacies that often lead to misconceptions. Let's address them:
Any Real Estate is Like-Kind: This is not always the case. The definition of like-kind is broad, but rules regulate it.
I have a year to reinvest: You only have 180 days to close on a new property after selling the old one.
1031 is for 'rich' investors: Not true, any real estate investor can leverage the benefits of 1031 exchanges.
To Wrap Up
1031 exchanges can be a great tool if used properly, allowing you to shift, diversify, and grow your portfolio while deferring capital gains tax. As a first-time investor, it is essential to have a clear understanding of this instrument, and we hope this article aids in that endeavor.
Want to estimate your potential capital gains tax deferment? Try our free 1031 exchange capital gains calculator and start planning today!
If you have any questions or need assistance, don't hesitate to contact us. Ready to start your journey with 1031 exchanges? Visit our home page and let's get started!