1031 Exchanges are a great option when considering the sale of an investment property, but what ARE they? Per the Internal Revenue Service of the US:
Whenever you sell business or investment property and you have a gain, you generally have to pay tax on the gain at the time of sale. IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax-free.
The exchange can include like-kind property exclusively or it can include like-kind property along with cash, liabilities and property that are not like-kind. If you receive cash, relief from debt, or property that is not like-kind, however, you may trigger some taxable gain in the year of the exchange. There can be both deferred and recognized gain in the same transaction when a taxpayer exchanges for like-kind property of lesser value.
Last year saw a record number of 1031 Exchanges and halfwayt through 2022, transactions remain robust!
If you are considering the sale of an investment property, rather than a tax liability of up to 40%, you may utilize a 1031 Exchange.