A 1031 tax exchange is something that all real estate investors have heard about, but many people do not truly understand. At its essence, a 1031 exchange is a tool that real estate investors can use to avoid capital gains tax indefinitely, so long as they follow the 1031 rules and continue to invest in “like kid” real estate assets. Essentially, in lieu of paying the standard federal tax on a realized gain from the sale of an investment property, an investor can defer the tax due on the sale of the asset by reinvesting the proceeds into another “like kind” property.
This process can be done over and over again so theoretically, an investor can defer their federal income tax until they decide to get out of real estate entirely (but who would want to do that). One thing to keep in mind is that you need to know that you are going to enter into a 1031 exchange early on in the process, as you will be required to involve a Qualified Intermediary, or exchange agent, in the process because the IRS is very strict on the fact that the sale proceeds can never be accessible by the seller. Want more info? Stay tuned for the next blog post where we will be exploring the step by step 1031 exchange process.