One of the most common real estate investment transactions is the 1031 Exchange. Simply put, a 1031 Exchange (also called a “like-kind” exchange) is the swap of one investment asset for another which defers capital gains taxes on profits.
A like-kind asset refers to selling one class of investment for a similar type of asset. For example, an investor currently holds several multi-family properties, such as duplexes, and wishes to sell them all in order to purchase a larger multi-family property, such as an apartment complex. This would qualify as a like-kind exchange.
There are specific IRS rules which must be carefully adhered to in order to qualify for the deferred capital gains tax. The sale must take place through an intermediary. Title companies are one such option and when coupled with the use of a real estate agent, the easiest. The new asset must also be identified within 45 days of the sale of the current asset and the sale must conclude within 180 days. Finally, the asset must be held for over 1 year before it is eligible for use in a 1031 exchange.
Serious investors use the 1031 exchange to buy and sell assets as new opportunities present themselves, while shielding themselves from immediate capital gains liability.