Understanding The 1031 exchange

The 1031 exchange allows a property owner to "swap" one property for another that is considered "like kind". Any capital gains tax is suspended until the gains are actually cashed in . The seller can keep rolling over the gains from one investment property to the next one. The taxes from the profit of each sale are deferred until the investor eventually sells for cash at some point in the future . By taking advantage of the 1031 Exchange, investors can put to work the Tax dollar before paying tax. The 1031 exchange is a tax deferred real estate transaction that allows for the disposal of one asset and the acquisition of another similar asset. Fortunately for investors the definition "like-kind" is quite open ended which gives them the option to choose from similar real estate types. Before initiating a 1031 exchange , the seller needs to be aware and understand the boundaries and the regulations and to follow them in order to postpone tax payments , thus It is advisable to seek for an expert's guidance. Due to the potential for tax avoidance there are rules concerning "related parties". who enter an exchange . This term includes family members , partnership corporations, trusts and others . It is allowed to sell to a related party as long you meet the rules such as buying a property from a related party and selling to unrelated is not permitted. Also , they must hold the property for a minimum two years from the time of the exchange . They must be able to prove that the transaction did not result in tax avoidance via an income tax basis swap. To sum up , 1031 exchange can be a vital instrument to defer taxes payments for real estate investors , freeing up cash for current investments , but , on the other end investors must know the rules and follow the law when preforming a1031 exchange .