What is a 1031 Exchange?Real estate investors have used 1031 Exchanges as part of their investment strategy for decades. A 1031 exchange is a swap of one real estate investment property for another
1031 Exchanges within Investment Properties
Dated: September 13 2022
What is a 1031 Exchange?
Real estate investors have used 1031 Exchanges as part of their investment strategy for decades. A 1031 exchange is a swap of one real estate investment property for another that allows capital gains taxes to be deferred. Investors use 1031's to defer capital gains and build wealth.
To break it down simply a 1031 exchange (derived from Section 1031 of the Internal Revenue Code) is a real estate investing tool that allows investors to defer capital gains tax, which is generally required upon the sale of a business or investment property, by placing the proceeds from that sale into a replacement property. The transaction must be a like-kind exchange meaning the property sold and the replacement property have to be similiar in nature and character, but not necessarily the same quality or grade. For example, an improved single-family property held for investment could be exchanged for an unimproved single-family property held for investment. Likewise, a ranch or farmland held for investment can be exchanged for single-family rentals used for business or investment purposes. Properties that are used primarily for personal use, such as a primary residence, a second home or vacation property, do not qualify as a like-kind exchange.