So, what is a 1031 exchange?

Simply stated, gains realized from the sale of real estate are taxable in the year in which you sell the property, but employing a 1031 Exchange defers that taxable event.  In effect, you can change the form of your investment without cashing out or realizing a capital gain.  The process of selling one property and buying another through a 1031 exchange allows you to grow your investment tax deferred.

Benefits of a 1031 Exchange

Deferral of taxes:  A 1031 Exchange allows you to sell your current investment property and reinvest in a new property without having to pay ordinary income, recaptured depreciation or capital gain taxes.  It is important to remember that you are deferring those taxes until you “cash out” of the property, but you are not eliminating them.

Increased funds for leverage and cash flow for reinvestment:  By deferring your taxes, you have more available money to invest in your new property giving you greater purchasing power.  By increasing your leverage, you have the ability to generate greater cash flows than if you had used part of your gains to pay your taxes instead of deferring them.

No limit to number of 1031 Exchanges:  The IRS does not limit the amount of times you can do a 1031 Exchange.  In theory, you could continue to exchange into numerous properties over the years and pass those investments over to your heirs at the desired or required time.

While there are valuable benefits afforded by a 1031 Exchange, there are very specific rules the IRS requires you to follow to receive the tax deferment.

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