A 1031 Exchange is a tax deferral method used when an investment property is sold and exchanged for another investment property of equal or greater value.

The 1031 section of the IRS code states that any capital gains tax that would be realized on the sale of the relinquished property is deferred until the re-sale of their replacement property. An investor has 45 days to locate a replacement property once their initial investment is sold. If the owner fails to identify the replacement within that time frame they will be taxed on the property. The replacement property must be of like-kind. Any property used for business purposes would qualify as like-kind. This allows investors to be creative when looking for a replacement property.  For instance, a 4-unit multi-family complex can be exchanged for a tenant-in-common, raw land, commercial office building or an oil field. Also, more than one property can replace the initial investment, and two properties can be exchanged for one. The investor has a total of 180 days to close on the purchase of their replacement property, or the due date of that year’s tax return, which ever occurs first. Before deciding to embark on a 1031 Exchange, investors have to consider the how much timing will factor into the success of deferring capital gains tax on an investment property.

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