What IRS Section 1031 Says
A 1031 Exchange enables real estate investors to buy and sell investment property without paying capital gains taxes. The IRS explains in Section 1031 of the IRS code:
To qualify as a Section 1031 exchange, a deferred exchange must be distinguished from the case of a taxpayer simply selling one property and using the proceeds to purchase another property (which is a taxable transaction). Rather, in a deferred exchange, the disposition of the relinquished property and acquisition of the replacement property must be mutually dependent parts of an integrated transaction constituting an exchange of property. Taxpayers engaging in deferred exchanges generally use exchange facilitators under exchange agreements pursuant to rules provided in the Income Tax Regulations. .
Kinds of Exchanges
There are typically three ways of engaging in a 1031 exchange.
- Standard Exchange. The property owner sells their property and purchases a second property with the tax-free profits of the relinquished property.
- Reverse Exchange. The property owner buys the acquired property first and sells their relinquished property later, transferring their profits to the qualified intermediary, who then transfers the exchanger the title.
- Improvement Exchange. The property owner applies funds from the relinquished exchange to improvements or construction on an acquired property.
To better understand how a 1031 Exchange might fit into your current investment strategy, schedule a consultation with one of our qualified exchange experts. Have more questions? Contact us here.