What exactly is the 1031?
IRC Section 1031 (a)(1) states:
“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 like-kind which is to be held either for productive use in a trade or business or for investment.”
Overwhelmed? Don’t be.
Basically, the 1031 allows an investor to sell a property and reinvest the proceeds in a new, like-kind property while deferring all capital gain taxes.
Still a little confused? Let me help (or try to – I’m no IRS expert).
It means that you can change or swap your investment without cashing it out — essentially continuing to grow your investment with deferred tax payments. Until you sell for cash, you avoid taxation..even if you profit from your investment exchange. (This benefits you because you could continue to reinvest in more profitable investments without being repeatedly taxed!)
The best part?
“Like-kind property” has a fairly loose definition: it refers to the nature of the investment rather than the physical form. SO, any type of investment property (duplex, family residence, etc) can be exchanged for another type of investment property. This ensures that investors are not locked into one form of investment property.. allowing flexibility!
The worst part?
While there is technically no limitation to how many times or how frequently you can apply a 1031, an investor who makes exchanges extremely rapidly or regularly may be dubbed a “dealer” and his or her properties will be considered “stock in trade” – meaning they are not allowed to swap real estate using the 1031 until they can prove that it was purchased solely for investment purposes. The lines here are a bit arbitrary, so discretion and advice from a professional is advised.
Keep a close eye on your calendar!!
From the date of closing on the original property, the investor has 45 days to select potential replacement properties and a deadline of 180 days after closing to purchase the new property.
What does NOT qualify for 1031 exchange?
- A primary residence
- Any property held “primarily for sale” or any property bought with the sole intent to sell (ex: a fixer-upper or a flip)
Remember: we are not IRS experts, so if you are interested in learning more…
- Check out this site to delve a little deeper or to learn if your property qualifies: http://www.1031exchange.com/faq/
- Get in touch with an exchange facilitator – as always, contact us for a referral 🙂
Fun fact: A 1031 exchange is also called a like-kind exchange or a Starker!