Taxes rarely make for exciting reading material, but if you own an investment property, there’s at least one set of IRS regulations you absolutely will want to understand: 1031 exchange rules. Why? Because normally when you sell an investment property for more than what you paid for it, you’d have to pay a hefty capital gains tax.
But with a 1031 exchange, you get to defer paying those taxes if you reinvest the proceeds in a new property, making an “exchange” rather than a sale. As the name implies, a 1031 Exchange is a swap of one investment property for a like-kind property instead of a traditional sale. If the transaction qualifies, any realized capital gains are deferred until the replacement property is sold at a later date.
Many investors would like to do a 1031 exchange. Some of them who do fix and flip call us for a 1031 exchange to roll the gain over into the next property. But can they? Although confusing, understanding IRS Code Section 1031 is worth it. It’s just that this transaction is subject to some strict regulations, so you’ll need to follow the 1031 exchange rules to the letter.