What You Need To Know | 1031 Exchange

What You Need To Know | 1031 Exchange

What is the Purpose of a 1031 Exchange?

The purpose of 1031 Exchanges is to allow investor-owners to move laterally or upward as they manage their investment property portfolios, deferring capital gains taxes on the sale and recapture of depreciation so they may put that money instead toward greater investments.

The IRS allows this only with exacting documentation on both the sale and replacement properties within scrupulously regulated time frames. An investor-owner must retain a Qualified Intermediary to generate the documentation pursuant to IRS requirements, as well as to hold and transfer exchange funds, during the 1031 time frame.

When should you use a 1031 Exchange?

  • You’d like to upgrade from a duplex to a triplex. Use a 1031 Exchange when you sell the old property and put the entire proceeds toward the new one.
  • You perceive better opportunities in a commercial property than what you’re now realizing from one of your residential rentals. Using a 1031 Exchange, you can exchange one kind of property for another, diversifying your investment property types.
  • You see great leasing potential in a low-priced fixer, but don’t have ready cash for necessary capital improvements. Use a 1031 Exchange to sell an investment property of higher value, purchase the fixer, and apply the difference in “build to suit” improvements.
  • You’re ready to retire from being a busy landlord for your tenants. Use a 1031 Exchange to purchase low-maintenance vacant land that you can pass on to your heirs.
  • You want to move out-of-state to be closer to your grandchildren, but need to preserve your investment properties for generated income and your heirs. Use a 1031 Exchange to sell those properties and purchase replacements in your new home state.