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) 

Good Luck!  

Cropped shot of Accounting staff are using calculators and graphing to pay annual taxes.