THE 1031 EXCHANGE: What Every Investor Should Know

There are several ways to benefit from owning property and being a real estate investor.  I have always considered a successful real estate investment as the fruitful result of finding the right property, the right financing partners, good people to work with, and finding the best ways to save money as part of the overall investment strategy.  One of the not-so-well-known ways to save profit dollars is including a 1031 exchange tax strategy whenever it is appropriate. 

 A 1031 exchange is a specific tax strategy that can help defer the taxation of the profits realized from the sale of the property. This strategy comes from Section 1031 of the Internal Revenue Code (IRC).  By practicing diligent observation of the rules embedded in Section 1031 of the IRC, anyone can use it to acquire numerous properties as well. The 1031 exchange can allow you to purchase another property with the proceeds from the sold (relinquished) property instead of immediately paying the tax consequence from the profitable sale. 

Now, here is the kicker rule that I am always diligent to observe for myself and for my clients: you have only 45 days in which to identify qualified replacement properties. 

The major benefit of a 1031 exchange is that it allows the investor to delay specific taxes and instead invest in other properties with the proceeds realized from the prior sales.  If the proceeds from the sale of a previously owned property are invested in a new property, then the resultant tax consequences from the previous sale are deferred. Therefore, the capital gain will not be taxable until a later strategically planned date.  But the replacement properties must be identified within 45 days of the sale of the current property.

A second benefit to a 1031 exchange is that it allows for more equity to become part of the investment.  Because of this, each time you invest in a new property from the 1031 exchange, the properties will gain a higher value.  The one thing to keep in mind if you are considering a 1031 exchange is that the new investment has to be what is known as "like-kind."  This means that the investment must be the same type of property that has been sold.  Before initiating the sale of the current property, it is important to consider this 1031 exchange mandate, as failure to follow this rule can cause problems with the new investment's profit yield later.  However, if you have realized sufficient funds from the sale of the relinquished property, the 1031 exchange will allow you to purchase more of the same type of property.

If you are seeking to build a strong real estate portfolio, the 1031 exchange will become relevant sooner or later.  knowing about the 1031 exchange is important.  This will help you with getting more out of your property and laying the foundation for your success in real estate investing -- and wealth building as a whole. 

This article is written by

Frederick W. Ford

Insurance, Mortgage, Real Estate, and Retirement Advisor

NMLS 640619

Direct 888.410.8853

This article is intended for informational purposes only and is not an advertisement nor solicitation.