What is a 1031 Real Estate Exchange?

A 1031 real estate exchange is a process by which real estate changes hands, but in a way that is not subject to capital gains taxes in the United States. The exchange is seen as a very profitable way to exchange real estate, yet avoid taxes and some real estate investors use it often. However, there are strict rules associated with a 1031 real estate exchange. There are certain transactions which are not covered by the rules of a 1031 real estate exchange. Those who are depending on the provision should contact a tax professional, perhaps even a tax attorney, before engaging in the exchange. One of the main rules is that private property held for personal use cannot be exchanged under this provision. However, there may be some other exemptions for private property covered under other portions of the US tax code. A 1031 real estate exchange applies only to properties that are held as investment opportunities, usually commercial endeavors. Also, the provision does not apply to cases ...  more

Have you said any of the following to yourself? • I'd love to sell this rental property, but I can't afford to pay the taxes. • My accountant tells me the taxes would kill me if I sold my rental property. • Why sell? The government will just get all the profit. • After I sold this rental property and paid the taxes, I wouldn't have enough cash left to buy the new property I want. If you have, then you are a great candidate for a 1031 Exchange. So, what exactly is a 1031 Exchange? Named after Internal Revenue Code Section 1031, a 1031 Exchange allows you to defer taxes on the profit you make when you sell investment real estate. The IRS requires you to comply with a few requirements, however. First, the old property you are selling and the new property you are buying must be rental/investment property or bare land. If you meet this test, you can sell any type of property (an apartment building) and buy any other type of property (an office building). Second, from the date of closing ...  more

Internal Revenue Code Section 1031 states specifically: “No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of a like kind which is to be held for productive use in a trade or business or for investment”.  more