What does 1031 Exchange mean?

People often throw around the term “1031 exchange”, but those new to it don’t often know what 1031 exchange means. The name “1031 exchange” refers to section 1031 of the U.S. Internal Revenue Service tax code, which states that one can exchange a property for another and defer the tax that would normally be due from a regular sale. Most 1031 exchanges deal with some form of real estate; they used to also be applied to business personal property but with recent changes in the tax code that is no longer the case.

A 1031 exchange can allow investors to sell a property and then turn around and purchase other properties without having to immediately pay capital gain taxes on the profit that he or she made in the original sale. Sellers will still be required to pay the taxes at a later point; however, these exchanges help investors to gain more wealth.

The first requirement for a 1031 exchange is that all properties are “like-kind”. This means that the properties must be of the same type or use. Most types of real estate are like-kind to each other, even vacant land, if they’re in the United States. One also needs to identify a replacement property within 45 days of selling the original property, and the entire exchange must be completed within 180 days after the original sale. Whenever one performs a 1031 exchange, the seller must use an independent intermediary to prepare the required documents for the IRS. In addition, the seller must not exchange the original property for a cheaper one or he or she will face tax considerations due to the difference in price.

In summary, 1031 exchanges can be difficult to handle, however they can be of great benefit to investors if done properly. They allow sellers to easily exchange properties and gain more wealth because they can defer capital gains taxes. Here at WealthBuilder 1031 Exchange Company, we’re ready to help you with any questions you have. Call us today at 888-508-1901 to get started.