What Is a 1031 Exchange?
For many real estate investors, a 1031 exchange is the key way to avoid taxes when you sell a rental property or other qualifying real estate investments.
By the end of this 1031 exchange overview, you’ll be ready to take the next steps to set up this tax strategy before selling any qualifying property with the help of the right professionals to structure the transactions.
Simply put, a 1031 exchange is a key tax-deferral strategy for real estate investors when buying and selling investment properties.
If you own a residential property and rent it out as an investment, then you may be surprised to face a tax bill when you sell it. Your gain from the sale and the amount of automatic depreciation deductions you received for the rental property are taxable if not properly reinvested.
Instead of instantly owing taxes on gains realized from the sale, you can reinvest the sale proceeds into a qualifying property as an exchange. Your tax liability is deferred so long as potential profits are continuously reinvested.
Admittedly, a 1031 exchange seems like an obscure tax concept at first. However, any investor can quickly gain a basic understanding of the tax advantages and eligible investments for 1031 like-kind exchanges.