1031 Exchanges: The Basics Explained

1031 Exchanges: The Basics Explained

Are you new to the world of real estate? There are several terms you should know about. Knowing certain terms will help you succeed in this area. 

One of the terms you should know about is a 1031 exchange. Serious real estate investors can use a 1031 exchange to max their profits. 

Read this guide to learn everything you must know about 1031 exchanges. You'll be using them in no time. 

What Is a 1031 Exchange?

Investing in real estate is about making profits. There are different ways that investors can keep their money. This is where a 1031 exchange comes in. 

The 1031 exchange is an IRS tax code that allows real estate investors to defer tax liability. With this rule, one can defer tax liability after selling an investment property for profit. 

The investor can use the proceeds from the sale to buy a new property. In essence, this rule doesn't allow the IRS to take income, as there were no proceeds for the sale. 

The 1031 exchange rules give an investor the chance to change their form of investment. An investor doesn't have to cash it out or view it as a capital gain. 

By doing this, the investment can continue to grow tax-deferred. It's a big win for investors. 

There's no limit to the use of the 1031 exchange real estate rule. A person can use it as it applies to their case. This rule allows a person to roll over the gain. 

Common 1031 Exchange Terminology

To use this rule to your advantage, you need to be familiar with its terminology. Knowledge is the key when it comes to making wise real estate investments. 

This rule can apply to business or investment properties. The IRS will approve an exchange if it considers the properties being exchanged to be like-kind. Without approval from the IRS, capital gains taxes can't be deferred.

The terms of this rule apply to the property the investor will sell. This is the relinquished property. 

The property the investor will buy is the replacement property. This rule gives an investor 45 days to identify the replacement property. The 45 days start at the original property’s sale. 

An investor has 180 days to close on the replacement property. The 180 days start after closing on the relinquished property sale.

It's all about sticking to the timeline. Time is of the essence when looking to complete an exchange. 

The Bottom Line on 1031 Exchanges

If you know all about 1031 exchanges, you can use this rule to your advantage. Savvy real estate investors use this rule as a tax-deferred strategy. 

This strategy helps real estate investors build wealth. There are different parts to this rule. You must know how to apply this rule to your real estate investments to avoid issues. 

Want to learn more about the 1031 exchanges? Contact us now to learn how we can help you use this rule when selling investment properties. 

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