A 1031 exchange gets its name from Section 1031 of the U.S. Internal Revenue Code, which allows you to avoid paying capital gains taxes when you sell an investment property and reinvest the proceeds from the sale within certain time limits in a property or properties of like kind and equal or greater value.
Under section 1031, any proceeds received from the sale of a property remain taxable. For that reason, proceeds from the sale must be transferred to a qualified intermediary, rather than the seller of the property, and the qualified intermediary transfers them to the seller of the replacement property or properties.
As an investor, there are a number of reasons why you may consider utilizing a 1031 exchange. Some of those reasons include:
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- You may be seeking a property that has better return prospects or may wish to diversify assets.
- If you are the owner of investment real estate, you might be looking for a managed property rather than managing one yourself.
- You might want to consolidate several properties into one, for purposes of estate planning, for example, or you might want to divide a single property into several assets.
- Reset the depreciation clock.
The tax deferment provided by a 1031 exchange is a wonderful opportunity for investors. Although it is complex at points, those complexities allow for a great deal of flexibility. This is not a procedure for an investor acting alone. Competent professional assistance is needed at practically every step.
