1031 Exchange: Understanding the Basics
Understanding 1031 Exchanges doesn't have to be hard. Read this article for key facts and valuable insights to help you get up to speed.
What is a 1031 Exchange?
A 1031 Exchange, also known as a like-kind exchange or a Starker exchange, is a method of avoiding capital gains taxes on a sale of a property. This type of exchange allows an individual or business to defer paying taxes on the sale of an investment or business property by reinvesting the proceeds from the sale into similar or “like-kind” investment or business property.
Tax Advantages of 1031 Exchange
The primary advantage of 1031 Exchange is that it helps defer capital gains taxes. That means that you can reinvest all of the proceeds from the sale of your old investment/business property into a similar property and still avoid paying capital gains taxes. For investors, this can be especially helpful in helping reduce the overall cost of their investment property.
Things to Consider With a 1031 Exchange
While taxes are the main benefit of 1031 Exchange, there are other things to consider. For example, you must invest in similar, or “like-kind” properties. That requires you to really know and understand the type of property you are interested in before you get started. Another thing to consider is that you must reinvest the proceeds from the sale of your old property within a certain time frame, usually 180 days or less. Additionally, the use of a qualified intermediary can help ensure the transaction is done properly and the tax consequences are minimized.
Conclusion
1031 Exchange can be an invaluable tool for investors looking to defer capital gains taxes on the sale of an investment property or business property. By reinvesting in similar properties, investors are able to retain more of their investment proceeds and, in turn, increase the profitability of their investments. However, it's important to consider the factors involved with this type of exchange and to work with a qualified intermediary to ensure the transaction is done properly.