1031 Tax Deferred Exchanges

living_roomSection 1031 of the Internal Revenue Code allows a property owner to trade one property for another without having to pay any capital gains taxes on the real estate transaction. In most sales, a property owner is taxed on any gain accumulated by the sale of the property. In an exchange, the tax on the transaction is deferred until some time in the future, usually when the new property is sold. These exchanges are called “Tax Free” exchanges or “1031 Tax Deferred” exchange.

A 1031 cannot be performed on your primary property but it can be performed on investment property. The property must be exchanged for “like-kind” property of equal or greater value. The Exchanger must sell property that is held for income or investment purposes and acquire replacement property that will be held for income or investment purposes. One property may be exchanged for more than one property. In a tax deferred exchange, the Exchanger has 45 days from the date the relinquished property closes to identify potential replacement properties. The purchase of the replacement property must be completed within 180 days after the closing of the relinquished property.

The advantage of a 1031 is that the taxpayer may dispose of property without incurring any immediate tax liability. There is much more information on 1031 exchanges, so if you would a free 1031 booklet, please email me at yourhiltonheadagent@mac.com.