Real Estate Investors' Number One Trick: 1031 Tax Exchange

The 1031 tax exchange had earned it's name rather unimaginatively: it comes from tax code.  This section of tax code mostly revolves around investment real estate.  The government is providing this opportunity for investors as an incentive to keep investing in real estate. 

How does it work?

To explain it simply, one could sell their investment property and not pay taxes on the sale by reinvesting the money back into another investment property.  This would allow an investor to increase their investments. 

Traditionally, these exchanges were allowed so that two owners could exchange their properties tax free.   However, the odds of someone finding a perfect trade are slim.  Therefore, most people execute a delayed exchange.  This means that a third party would hold onto the funds received from selling a property until another property is acquired.  

Important:

• The intermediary must receive the funds directly.  If the seller receives the funds, they will not be eligible for the 1031 exchange. 
  
• Within 45 days of the original sale, a property must be designated as a replacement.  This must be provided to the intermediary in writing. 
• The closing of the replacement property must occur within 180 days of the sale of the previous property. 
• Any cash leftover from this transaction is taxable.  

Please let me know if you have any questions by leaving a comment below.