Section 1031 of the Internal Revenue Code allows an owner of investment property to exchange property and defer paying federal and state capital gain taxes (20%+ applicable state taxes) if they purchase a “like-kind” property following the rules and regulations of the Internal Revenue Code. This allows investors to use all of their proceeds from their sale to leverage into more valuable real estate, increase cash flow, diversify into other properties, reduce management or consolidate into one property.
What is like kind property?
There is some confusion regarding what type of property qualifies for a §1031 tax deferred exchange. Like-Kind” property can include, but is not limited to, any of the following, provided it is held for investment:
- Single Family Rental
- Duplex
- Apartment
- Commercial Property
- Raw Land
For example, a single-family rental can be exchanged for raw land, or apartments or a commercial building. In addition, properties can be exchanged anywhere within the United States.
ADVANTAGES OF AN EXCHANGE
1. Preservation of equity
2. Maximize return on investment
3. Increased cash flow from larger properties
ANALYZE THE BENEFITS BEFORE SELLING
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.
WHEN IS A §1031 EXCHANGE APPLICABLE?
It is applicable whenever a property owner intends to SELL any property that is not their primary residence (and falls under the definition of “like-kind”) and plans to BUY another “like-kind” property within 180 calendar days following the closing of their relinquished property. Paramount to any exchange is a competent and experienced Intermediary. Asset Preservation of Nashua, NH is one such entity which structures, consults, guides and documents the exchange transaction from beginning to end.
Information provided by Asset Preservation of Nashua.
What is a 1031 Tax exchange?
