1031 Exchange – A Big Win for Real Estate Investors
1031 Exchange is basically a powerful tax-deferment strategy for real estate held as an investment. 1031 Exchange allows the investors to sell a property without having to pay capital gains on the sale.
However, there is a condition to it. To benefit from the 1031 Exchange, you have to reinvest the equity received from the sale into another “like-kind” purchase.
Subsequently, following this strategy allows investors to reinvest real estate equity several times over a lifetime without having to pay taxes on their gains!
For example, if you buy a property for $200,000 and its value appreciates to $300,000 over the years, you can now play the 1031 Exchange strategy here. For this, you’ll have to reinvest the $200,000 in different properties and keep the gains of $100,000.
This way, you’ll only have to pay the taxes over the $100,000 gains and not on the entire amount of $300,000 that you had sold the property at. Sounds cool, doesn’t it?
But, certainly, there are some rules to it too:
1031 Exchange Rules
- Property must be “like-kind”. All real estate properties count in it apart from primary or secondary homes, house flipping and quick resale.
- Replacement property should be of equal or greater value.
- The new or replacement property must be chosen within 45 days of the sale.
- The new or replacement property must be officially bought within 180 days.
- During the 180 days window, the equity amount must not be used or put into the investor’s bank. (An intermediary account should be used to store the money)