A 1031 Exchange allows an investor to “defer” paying capital gains taxes on an investment property when it is sold, as long as another “like-kind property” is purchased with the profit gained by the sale of the first property.

What do you need to know about the 1031 exchange?

A 1031 exchange — also recognized by the IRS as a like-kind exchange — enables real estate investors to defer the capital gains tax liability on the sale of an investment property by using those proceeds to buy another property.

How long does it take to replace a property in a 1031 exchange?

From the time of closing on the relinquished property, the investor has 45 days to nominate potential replacement properties and a total of 180 days from closing to acquire the replacement property. Identification requirements: The investor must identify the replacement property prior to midnight on the 45th day.

Is there a way to defer capital gains after death?

In theory, an investor could continue deferring capital gains on investment property until death, potentially avoiding them all together. In the early days of “like-kind exchanges,” the term was taken quite literally and often posed difficulties.

What does 1031 exchange mean for real estate?

When you sell a property, you are disposing of your tangible real estate or what the IRS refers to as “real property.” A 1031 exchange allows you to trade or exchange “for property of like-kind, which is to be held either for productive use in a trade or business for investment,” according to Internal Revenue Code (IRC) Section 1031 (a) (1).

What happens if the 1031 exchange is cut?

The loss of the 1031 exchange would greatly reduce incentives for developers to build more units due to loss of profitability and reduce real estate capital investment and development, which would be truly detrimental to communities at a time when the U.S. is desperately in need of economic expansion.

What are the rules for deferral of capital gains?

For deferral of all gains the replacement property (ies) must cost at least $460,000 (line 3) and the amount of cash reinvested must be at least $360,000.00 (line 17). The balance of funds needed to purchase the new property (ies) may be borrowed and/or be new cash.

What does 1031 exchange stand for in real estate?

Updated Mar 12, 2021 In real estate, a 1031 exchange is a swap of one investment property for another that allows capital gains taxes to be deferred. The term, which gets its name from IRS code…

How long does it take to do a 1031 exchange?

The property owner has 45 calendar days, post-closing of the first property, to identify up to three potential properties of like-kind. After the properties are identified, the investor has 180 days to make the purchase and initiate the exchange OR by the due date of the income tax return with extension,…

Do you have to pay capital gains tax on the way out?

Having to pay capital gains tax on the way out can be very painful. Especially since prices have surged to all-time highs in many areas of the country. This article explores the other side of the 1031 exchange.