What is a 1031 Exchange?

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Real estate investors know the term 1031 exchange very well, but those new to purchasing real estate investment properties often have questions. Check out this realtor.com article that breaks down exactly what a 1031 exchange is and how it’s helpful for investors.

The term ‘1031 exchange’ gets its name from the Internal Revenue Service code, Section 1031. This section allows for the seller of an investment property to defer paying capital gains taxes by using the proceeds from that property to buy a replacement investment property. There are rules and regulations associated with a 1031 exchange and it’s always important to talk to your accountant before moving forward. Here are a few important well-known rules/tips:

1. The real property you are purchasing should be ‘like-kind,’ or also used for investment purposes, to the one you are selling.

2. You have 45 days to identify in writing a replacement property and 180 days to acquire said property.

3. There is no limit on how many times or how frequently an investor-owner can do a 1031 exchange.

4. “House flippers” qualify for a 1031 exchange, with a few conditions. The property must be owned for two years for it to qualify, so if the owners flip too fast, it won’t work.

5. Owners who make the investment property their primary residence won’t meet the requirements of a 1031 exchange.

6. It should be noted that a 1031 exchange does not eliminate capital gains—it just defers it.