WHAT IS A 1031 EXCHANGE?
According to Section 1031 of the IRS Revenue Code, no gain or loss will be recognized in the sale of a property held for business or investment purposes. A 1031 exchange allows you to defer a capital gains tax when exchanging one like-kind property for another. If utilized properly, the 1031 exchange process can be an effective wealth-building tool, potentially allowing you to “swap till you drop” as you continue to make good on your investments in new properties.
There are several stipulations that govern a 1031 exchange.
- The property must be a business or investment property, not a personal residence.
- You may only utilize this benefit if you are purchasing a like-kind property. That means it is another investment property within the US. A 1031 exchange may not apply to other kinds of property, such as stocks and bonds, securities or debts, and partnerships.
- Time is of the essence. You have only 45 days from the time you relinquish your property to identify and close on the new property in order for a 1031 exchange to be valid. The IRS very rarely grants extensions on this deadline.
- More money to invest. A 1031 exchange can increase your purchasing power. Instead of paying a capital gains tax, you can use that money to invest in property of greater value.
- Reduction in maintenance costs. If you own a property that is associated with significant maintenance costs, you can save money by exchanging it for a like-kind property that does not incur these expenses.
- Wealth accumulation. If you utilize the 1031 exchange for each purchase, you can accumulate wealth over time. Your capital gains tax can be as much as 15%, so postponing it multiple times can add up to significant savings, which eventually can be passed on to your heirs.
It’s essential to plan carefully if you want to take advantage of a 1031 exchange because of the many guidelines and regulations which can affect it. A 1031 exchange requires a qualified intermediary to handle the sale. This intermediary will assist you in navigating the many components of a successful 1031 exchange. Make sure you seek advice from a financial planner to reap the full benefit of your 1031 exchange.