You may have heard of people “exchanging” their investment property to avoid huge tax bites out of their sale proceeds. An exchange of real property can be a valuable tool to defer or avoid capital gains tax on real estate transactions.
Section 1031 of the IRS Code offers real estate investors a great investment opportunity to build wealth and save taxes. By completing a 1031 exchange, you can dispose of investment property, use all of the equity to acquire replacement investment property, defer the capital gains tax that would ordinarily be paid, and leverage all of your equity into a replacement property.
Replacement property acquired in an exchange must be of “like-kind” or similar to the property being sold. The following are examples of properties that could be eligible for a 1031 exchange:
- Single Family Rental
- Multi-Family Rentals
- Raw Land
- Retail Offices
- Golf Course
- Leases of 30 years or more
- Properties NOT eligible under 1031 include foreign property and primary residences.
1031 exchanges are primarily designed for people interested in investment properties, not for typical home sellers and buyers looking to purchase a residence.