1031 Deferred Exchange

If you are an adult taxpayer, you probably know that just about everything is taxed. Whether you agree with it or not is not important because whether you believe the government wastes money or that taxes are necessary, we all have to pay them. That is just the way it is.

If you are a real estate investor, you probably know about capital gains taxes. If you buy a piece of property, and then sell that property at a profit, the government taxes you on the profit you made. It sort of seems like it is hard to make a profit in real estate investing if the government is just going to tax your profits. Well, the IRS has thrown us a bone in the form of the 1031 Exchange.

If you invest in a piece of property, sell it for a profit, and then use the money to invest in more property, you can use the 1031 Exchange to defer your capital gains taxes. You may have heard people say that by using the 1031 Exchange, you do not have to pay any capital gains taxes.

This is not totally true. When you use the 1031 deferred exchange tax breaks, you simply defer your capital gains taxes until you sell a property investment without reinvesting the money into another property investment.

When a real estate or business property investor exchanges one investment property for another, they are not really cashing their investment out. They do not actually generate any income with which to pay capital gains taxes in the first place.

The IRS recognizes this and the 1031 allows your capital gains taxes to be put off until you actually generate income from the sale of a property. That is, you sell a property for a profit without using all of the generated funds to reinvest into another investment property.

Obviously, if you are planning to sell one of your property investments and using the money you make from the sale to buy a new investment property, then you should use the 1031 deferred exchange tax breaks. There are many reasons you would want to reinvest in a replacement property. Some investors like to keep their investment properties near them.

So if you are plan to move, you may want to exchange your nearby apartment complex investment for a replacement investment property near your new city. Some investors like to move from one type of investment property, say, vacant lots to be sold to developers, for another type, such as an office building to be rented out.

We do not get a lot of breaks from the IRS, so when we do get one, it is a good idea to make use of it. You can use the 1031 Exchange each time you sell one investment property to invest in another. This allows you to build your wealth though smart investing without being help back by taxation each time you transfer your investment from one property to another.

1031 Tax |