1031 Exchange is Essentially an Interest Free IRS Loan


A 1031 Tax Deferred Exchange is also known as a Like-Kind Exchange and a Starker Exchange. If you own any type of investment property you should pay attention to this relatively unknown perk which essentially is an interest free, no term loan from the government. Basically the investors are given the opportunity to defer all of their capital gains taxes with no limit on the number of times they are used. Instead of paying taxes at the time of sale the investor can put those dollars to work in other investment properties.

The 1031 provision is for investment and business property, although the rules can apply to a former primary residence under certain conditions. There are also ways that you can use 1031 for swapping vacation homes but this loophole is much narrower than it used to be.

Today’s 1031 tax-deferred exchange is used to defer paying capital gains taxes on one investment property when an almost immediate repurchase of a like-kind property occurs. Investors can “exchange” property that’s residential, commercial, industrial, or even leased if the lease is for 30 years or more and includes ownership interest. Investors can exchange into vacant land, hotels, motels, etc., provided the exchange meets certain IRS rules. Using a 1031 tax exchange provides a safe and legal procedure for rolling sales profits into new property as a non-taxable (in the current tax year) event.

A 1031 Exchange is a government perk so there are definitely rules that must be followed. Anyone considering a 1031 exchange should meet with a qualified tax professional and qualified intermediary for advice. A qualified intermediary is a person with expertise in like-kind exchanges. They can offer information on the 45 day identification period and the 189 day exchange period. There are many other nuances to 1031 Exchange some of which are explained in this article.

If you are considering a 1031 Exchange, they sound more intense than they really are if you consult your accountant, a qualified intermediary and a knowledgeable real estate agent.

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