What is a 1031 Exchange
What is a Real Estate 1031 Exchange
IRC Section 1031, a properly structured 1031 exchange allows an investor to sell a property, to reinvest the proceeds in a new property and to defer all capital gain taxes. IRC Section 1031 (a)(1) states:
“No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment, if such real property is exchanged solely for real property of like-kind which is to be held either for productive use in a trade or business or for investment.”
Analyze and Understand the Benefit
The benefits of IRC Section 1031 exchanges can be tremendous! Investors are often able to defer thousands of dollars in capital gain taxes, both at federal and state levels. If the requirements of a valid 1031 exchange are met, capital gain recognition will be deferred until the taxpayer chooses to recognize it. This essentially results in a long-term, interest-free loan from the IRS.
Advantages of a 1031 Exchange
- Preservation of equity
- Maximize return on investment
- Increased cash flow from larger properties
Most Popular Types of Real Estate 1031 Exchanges
1 - Simultaneous Exchange
A simultaneous exchange occurs when the replacement property and relinquished property close on the same day. As the name suggests, these closings occur in a simultaneous fashion.
2 - Delayed Exhange
The delayed like-kind exchange, which is by far the most common type of exchange chosen by investors today, occurs when the exchangor relinquishes the original property before he acquires replacement property.
3 - Reverse Exchange
A reverse exchange, also known as a forward exchange, occurs when you acquire a replacement property through an exchange accommodation titleholder before you identify the replacement property. In theory, this type of exchange is very simple: you buy first and you pay later.
4- Construction/Improvement Exchange
The construction exchange allows taxpayers to make improvements on the replacement property by using the exchange equity. To put this into layman’s terms, the taxpayer can use their tax-deferred dollars to enhance the replacement property while it is placed in the hands of a qualified intermediary for the remainder of the 180 day period.
If you would like to discuss your portfolio strategies, we are here for you! Please call us at (703) 475-1009 or email us at Finsen1031exchange@gmail.com
