Value of a 1031 Exchange

When a taxpayer sells a capital asset whether personal or real property and if there is a gain, tax has to be paid on that gain in the year of the sale. A IRC Section 1031 provides an exception and allows the taxpayer to postpone paying the tax if the proceeds from the sale are reinvested in similar property as part of a qualifying like-kind exchange. Gain deferred in an exchange is tax-deferred, but not tax free.

A taxpayer can completely defer all proceeds into new property or do a partial exchange and retain some of the proceeds but will have to pay taxes on the amount retained.

Individuals, C corporations, S corporations, partnerships (general or limited), limited liability companies, trusts and any other taxpaying entity can do an exchange.

Doing an exchange, the taxpayer has to meet certain timelines of identification and the close of escrow on the purchase property. The tremendous value of an exchange is being able to defer capital gain taxes to a later time and perhaps throughout one’s lifetime to pass your investments on to your heirs at a step-up in basis. People do exchanges to get out of management of the property not wanting to deal with a bunch of residential tenants and so they exchange into a commercial one tenant building or vacant land. People exchange because they move and they want to take their investment property with them and not want to avoid paying taxes. People increase their portfolio of wealth by doing an exchange. By using all the proceeds form a sale they can leverage that amount to a more expensive structure. A 1031 exchange is a valuable tool to any investor dealing in real estate.