What is a 1031 Exchange?
Putting Your Money to Work
By: Brian Lytle
Typically when a property owner sells his or her property, he is taxed on any gain realized from the sale. However, when a Section 1031 exchange is utilized, the tax on the gain is deferred until some future date.
1031 Tax Deferred Exchanges
Section 1031 provides that no gain or loss shall be recognized on the exchange of property held for productive use in the trade or business, or for investment. A tax deferred exchange is a method in which a property owner trades one or more relinquished properties for one or more replacement properties of “like-kind”, while deferring the payment of federal income taxes and some state taxes on the transaction.
If you own investment property and are contemplating a sale then you should consider a Section 1031 exchange. Lytle Law, my law firm, can help you plan your strategy for the exchange, and then locate what is known as an intermediary to hold the money until such time as the exchange is completed with the purchase of the replacement property. Sometimes, particularly in a volatile real estate market, it can be hard to find a replacement within the 45-day designation time period, so you can also consider a reverse exchange whereby you actually purchase the replacement property first and then sell the relinquished property afterwards.
For the savvy investor, this tax deferment strategy should be a part of your arsenal.