1031 Exchanges…A Money Saving Strategy

Properly done, a 1031 Exchange can be a great strategy with regard to saving money and deferring any capital gains tax. One must remember that we are talking about deferring and not eliminating the tax, but with planning and forethought, it does make for a great tool in in your real estate investing arsenal.

Basically, although a bit gray in the way it works, a 1031 Exchange (Section 1031 in the IRS Code) allows taxpayers who are selling a property held for business or investment purposes to completely defer any capital gains from the sale, so long as all the equity (gains) from the sale are used to purchase a like-kind property. Failing to use all the gain to purchase a property of equal value or higher than the one sold, will be subject to standard capital gain taxes.

There are different kinds of 1031 Exchanges, like a Reverse Exchange or Improvement Exchange. With a reverse exchange, the seller will go out and identify a property to purchase, prior to selling his home. The exchange expert or QI will then set up an EAT (Exchange Accommodation Titleholder) who will purchase and hold the identified property, until such time as the exchange is completed. This must be done within 180 days. An Improvement Exchange differs in the fact that any proceeds from a sale can be used for new construction to build or make improvements to the replacement property. Using this strategy can help improve the amount of money saved. 

The key to a good 1031 Exchange is not only identifying key properties, but also using a 1031 expert to help with the exchange. Done correctly, a 1031 Exchange is a great way to conserve capital and increase wealth.