Defer capital gains taxes when you sell one investment property and purchase another! Is this legal? You bet! In fact the IRS actually created the 1031 Exchange code for this exact purpose. “1031 Exchange” is short for Internal Revenue Code (IRC) Section 1031

In fact the IRS actually created the 1031 Exchange code for this exact purpose. “1031 Exchange” is short for Internal Revenue Code (IRC) Section 1031.

1031 Exchange Basics
You can sell one investment property and instead of paying the capital gains tax on it you can reinvest the full proceeds into other real estate and defer the capital gain tax. For a short course on 1031 Exchange’s follow this link www.firstexchange.com

1031 Exchange History
It’s been around since the 1920’s. It’s been revised and clarified through the years and has become very popular over the last couple of decades.

1031 Exchange Benefits
First it is important that investors consult with their tax advisors to see if a 1031 Exchange makes sense for them.
With that being said, this tool is a very nice way for investors to accumulate wealth. Essentially investors receive an interest free loan from the government in the amount that would have been paid in taxes. By deferring the taxes and reinvesting those funds investors are able to purchase more expensive pieces of property. Sell that property and the cycle starts all over. As long as you continue to use the 1031 Exchange tool capital gains taxes are deferred. And you can do it over and over and over! But keep in mind, “tax-deferred” is not the same as “tax-free”. At some point when a property is sold and the 1031 Exchange tool is not implemented the capital gains taxes will be due. However, currently if you use the 1031 Exchange until your time of death, your heirs will get a break on the capital gains taxes.

1031 Exchange Cons
As with everything there are pros and cons. Here are the cons of using a 1031 Exchange. First there are time limits. There are time limits on how long you have to “exchange” properties. There are time limits on how long you have to identify replacement properties. There are time limits on how long you have to close on the replacement property. And there are costs. You must use a qualified intermediary and they charge money to facilitate this process. Although there are some flat fee based services available, many times the cost is determined by the values of the properties being exchanged. And finally, it can a complicated and seeming overwhelming experience to use this tool, especially the first time.

Our best 1031 Exchange Advice:
1. Use a real estate agent like us to handle a 1031 Exchange. Not only are we familiar with this process, we’ve used it with our own investment property. There is language that must be used in the purchase agreements of the relinquished property and the replacement property. We know that language and how to use it.
2. Use a qualified intermediary who does 1031 Exchanges on a regular basis. We advise our clients to use First American Title Company. They have a whole department dedicated exclusively to 1031 Exchanges.
3. Consult your tax advisor. This is critical.