What Is a 1031 Exchange?

An investor will typically pay between 15% and 20% on any capital gains from the sale of an investment property in state and federal taxes. This is a substantial tax liability, and is a serious impediment to growing one’s investment portfolio. A 1031 Exchange is a mechanism by which investors can greatly reduce or even eliminate this tax liability under certain circumstances. If the investor’s goal in selling his or her property is to buy another investment property, he or she may simply swap properties under a 1031 Exchange and save on capital gains taxes.

Rules of a 1031 Exchange

The relinquished property and the replacement property must be of like-kind. This means they have to be of the same asset class i.e. real estate for real estate, industrial machinery for industrial machinery, office equipment for office equipment and so on. The assets swapped in a 1031 Exchange must be used for business purposes or must be kept for investment. Finally, the price of the replacement asset must be of equal or greater value to the net sales price of the relinquished asset.

Any cash or additional proceeds obtained from the sale of the relinquished asset must be used in the purchase of the replacement asset.

1031 Exchange Timeline

The investor must complete the acquisition of the replacement property within 180 days of the transfer of the relinquished property. The investor has 45 days to formally identify the replacement property in writing after the sale of his relinquished property – the 180 day limit and the 45 day timelines run concurrently. To put it simply, the whole process has to be wrapped up in 180 days for a qualified exchange to take place under the eyes of the IRS.

Why do a 1031 Exchange in San Diego?

Investors successfully employ 1031 Exchanges as a means of reducing or eliminating capital gains tax from the sale of investment properties. I work closely with 1031 Exchange specialists to structure the best deals that will help you get the most from your investment dollar. Call today to see what I can do for you.