In a typical property sale, the owner must pay taxes on the gain or appreciation of the relinquished property. A §1031 tax deferred exchange is the method by which one property can be sold and another “like-kind” property can be acquired while deferring the capital gains tax owed on the sale of the relinquished property. These tax-deferred exchanges are authorized by the Internal Revenue Code Section 1031. The “like-kind” definition for real estate is very broad – any real estate is like-kind with any real estate held for investment purposes. For example, the raw land would be like-kind with an office building or an apartment property.
There is no limit to the number of exchanges that an investor can do, making it possible to defer the tax consequences indefinitely; however, the property that is sold and that is acquired must be qualified property. Properties that do not qualify are primary residences, second homes, personal property, and inventory. Most other investment property qualifies.
One of the primary advantages of completing a 1031 exchange is the ability to defer taxes on the sale of your property and reinvest 100% of the proceeds. (Combined Federal and State tax rates can be as high as 25%). Other benefits include the ability to diversify your investment real estate by geographic location, property type, property quality, and potentially increase or create positive cash flows.
1031 Exchange Timeline
The identification of the potential replacement properties must be done within 45 days from the close of escrow on the relinquished property (the 45-day rule).
The investor has 180 days from the close of the relinquished property to close escrow on one or more of the properties that were previously identified (the 180-day rule).
Properties for Sale 