If you want to add investment real estate to your diversified portfolio, you’re going to want to know what a 1031 Exchange is. While the rules and regulations for this tactic can get complicated, understanding the basic concepts will help you decide if this strategy is right for you.
Let’s look at what a 1031 Exchange is and some of the requirements to help you determine if you should pursue this avenue further for your long-term investment goals.
In the simplest terms, a 1031 Exchange is a real estate investment strategy that allows you to defer your capital gains taxes on an investment property if you sell it and buy another “like-kind” property. According to the IRS, “if you make a like-kind exchange, you are not required to recognize a gain or loss under Internal Revenue Code Section 1031.”1,2
While a 1031 Exchange can be a great strategy for deferring capital gains taxes, there are some requirements to consider to ensure that both properties are eligible. Here are a few of the main requirements:
As you can see, there are a lot of specifics to consider when researching 1031 Exchanges. For this reason, they aren’t right for everyone. But they are suitable for select investors, and in such cases, they have many benefits.
Mainly, 1031 Exchanges are good for people who are looking to add investment real estate to their portfolios, especially those who already have investment property. If you already have an investment property and want to swap it for another property without paying capital gains taxes, talk to a CPA or financial advisor to make sure you get the specifics correct.
Another great benefit of 1031 Exchanges is that, if you pass away without selling a property obtained through a 1031 Exchange, your heirs won’t be expected to pay capital gains taxes on the property. In addition, they will inherit it at its stepped-up market rate value.6
To summarize, the main benefits of a 1031 Exchange are:
A 1031 Exchange is just one vehicle in a well-diversified financial strategy and something to consider for investors interested in growing their investment real estate portfolios.