According to the National Association of Realtors, in 2017, 60% of all real estate agents in the US participated in one or more 1031 replacement transactions.
The history of 1031 exchanges goes back to 1921. Most people in the real estate industry have heard of them and seem to have a good working grasp of how they work, and what the requirements are. Occasionally we get calls from someone who has not heard of a 1031 exchange, or has no clue what the rules are. So now would be a good time to do a refresher on the basic rules of an exchange.
People ask, “Why should I do a 1031 exchange?” I can answer this question in two words: “Financial Leveraging.” By doing a 1031 exchange, the taxes you would have paid to the government are now working to earn you money.
A 1031 exchange allows a taxpayer to postpone their long-term capital gains tax when selling an investment property by exchanging both the basis and the gain into a new investment property. This gives an investor financial leverage. If you have a property used for investment or business and you plan on buying another property used for investment or business, then yes, you need to do a 1031 exchange.
In simple terms, a 1031 exchange moves the gain from the sale of an old investment property into the purchase of a new investment property. By moving the gain into a new property, you defer paying tax on that gain into the future.
A 1031 exchange is NOT ‘a-sale-and-a-purchase,’ but an exchange of one property for another. There must be a written exchange agreement that shows that ALL the steps, from the transfer of the old property to the receipt of the new, is part of an overall plan.
For more information, please contact us to discuss your situation.