1031 Exchange Investment Strategy
Taking advantage of the Tax Deferred Exchange known as 1031 exchange enables a property seller to shift funds from the sold property to a new investment and defer the obligation to pay capital gains taxes. This process is extremely beneficial when an owner wishes to build net worth and either consolidate or diversify their holdings. By deferring payment of these taxes, the property owner may realize improved cash flow, solve management problems, increase leverage and enhance the opportunity for greater wealth appreciation.
How does it work?
According to the Internal Revenue Service’s Code 1.1031(k), a person owning property for investment or business purposes can sell their property and purchase “like-kind” replacement property or properties, through the use of a Qualified Intermediary, in order to defer payment of capital gains taxes. The replacement property the exchanger expects to purchase must identified within 45 days, and settled within 180 days of the date of settlement of the relinquished property.
What are the requirements for reinvesting in a replacement property?
The replacement property or properties must be of equal or greater value than the relinquished property, and all cash equity from the sale must be reinvested. If not, then any remaining funds are subject to capital gains.
What is considered Like-Kind Property?
“Like-Kind” doesn’t refer to the great or quality of a property, but rather the property’s nature or character. For example, if you own a single-family rental property and wish to purchase a farm as a replacement, then that falls under the definition of “like-kind”. Exchanging a lot or condominium for an office building also meets those guidelines. The IRS has broadly defined the type of property that may be exchanged for any other type of property or properties.