Capital gains taxes are always a critical concern for the real estate investor. You work hard to build your property portfolio and grow your assets; the last thing you want to do is pay it right back out in the form of taxes. Through the 1031 Tax-Deferred Exchange program, you can accomplish two critical goals: You can grow your income property investment portfolio much more quickly, and you can hold on to more of your hard-earned assets.

A 1031 Exchange is a powerful tool for the income property investor; unfortunately many investors are not aware of this program and how it actually works. The good news is that the program is easy to understand, and even easier to use. Typically, upon the sale of a real estate investment property (assuming the property is sold for a profit), the income property investor incurs a capital gain on which they owe a capital gains tax. Section 1031 of the U.S. tax code allows the income property investor, under most circumstances, to *defer that tax liability for up to a year.

In a 1031 Exchange scenario, the income property investor has 45 days from the sale of an income property to identify a like-kind property that will be purchased in replacement of the property that was just sold. The investor must close escrow on the new property within 180 days after close of escrow on the first property to comply with 1031 rules. A 1031 Exchange transaction requires that the investor use a “qualified intermediary” to oversee the exchange. This intermediary holds the funds to be reinvested and ensures the investor’s compliance with all rules and deadlines. The significant benefit of the intermediary is that they are experts in the process and will guide the income property investor through any questions or confusion.

So what is a “like-kind” property? A like-kind property is considered to be any real estate used for the same purpose as the first property. The definition is broad under this portion of the Tax Code, including the possibility of exchanging a residential property for a commercial one in most cases. The main restriction is that the income property investor cannot use a personal residence in exchange for income-producing property. The value and equity of the replacement property must be the same or greater than the previous property, otherwise the difference is taxable.

So how does the income property investor grow his portfolio and investment assets with a 1031 exchange program? The income property investor, through a 1031 Exchange process, can purchase a newer, larger, or more valuable income property, producing more rent and a higher ROI, and greater appreciation leading to a higher ultimate return at the time of sale. Each income property investor can do as many tax deferred exchanges as he or she wishes.  Although the IRS does not stipulate how long the investor must hold a 1031 exchange property, many accountants and tax professionals recommend holding a 1031 property for at least one to two years.

More questions about how a 1031 Exchange program can help you personally? Contact us or post your comments here for a personal consultation today.

NOTE:  We pride ourselves on bringing you the most informative, up-to-date, and accurate information possible about the often-confusing world of real estate investing.  Nothing we post however is intended to be taken as legal advice.  You should always contact a licensed legal professional for information and advice about your own unique investment scenarios.