What is a 1031 Exchange?
For investors, a 1031 Exchange may provide an effective tax strategy for tax deferral as part of succession and estate planning. Internal Revenue Code Section 1031 provides that “no gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like kind which is to be held either for productive use in a trade or business or for investment”.
Basic Requirements
For complete tax deferral, investors must:
- Reinvest 100% of net sales proceeds into the replacement property.
- Acquire an equal or greater amount of debt on the replacement property.
- Identify potential replacement property within 45 days from the date of sale.
- Close on the replacement property within 180 days from the date of sale. Use a Qualified Intermediary (QI)
Potential Benefits
A properly executed 1031 Exchange may allow investors to defer State and Federal income taxation upon the sale of appreciated real estate, thereby preserving equity and potentially maximizing total return.
A portion of monthly income may be offset by depreciation.
Investors seeking more current income can benefit from non-income producing or under-performing assets into one or more high-quality properties that may generate monthly income.
Growth in the overall value of real estate holdings is necessary to overcome the effects of inflation. A 1031 Exchange may provide investors the opportunity to allocate their capital into assets that may increase the potential for appreciation.