1031 Exchanges & How to Utilize them to your Advantage
A 1031 exchange, also known as a "like-kind exchange" or "tax-deferred exchange," is a tax strategy that allows commercial real estate investors to defer capital gains taxes when selling one property and acquiring another "like-kind" property.
Under Section 1031 of the Internal Revenue Code, if a commercial real estate investor sells a property and uses the proceeds to purchase another property that is similar in nature, the investor can defer paying capital gains taxes on the sale. Instead, the investor can reinvest the proceeds into the new property and defer the taxes until a future date when the new property is sold.
To take advantage of a 1031 exchange, the investor must follow specific rules and guidelines, such as:
The properties involved in the exchange must be of the same nature or character, such as two commercial buildings or two rental properties.
The investor must identify a replacement property within 45 days of selling the original property.
The investor must close on the replacement property within 180 days of selling the original property.
By utilizing a 1031 exchange, a commercial real estate investor can avoid paying taxes on the sale of a property, which can result in significant savings. Additionally, the investor can leverage the tax savings to acquire a higher-value property or diversify their portfolio. However, it is important to consult with a qualified tax advisor and attorney to ensure compliance with all regulations and requirements of a 1031 exchange.
If you have any questions about this article or would like to discuss a scenario of your own with our team, please feel free to contact Colin Dubel at firstname.lastname@example.org or 949-735-6415.