1031 Exchange

What is 1031? – Internal Revenue Code Section 1031 Tax-Deferred Exchanges

In general, the Internal Revenue Code imposes taxes on the revenue resulting from the transfer of investment property. Section 1031 of the Code is an exception to this general rule allowing 100% of the gains from the disposition of the property to be deferred. These deferred gains, as well as the gains from the new property, are not taxed until the new property is transferred and fails to qualify for tax deferral.

To qualify for this deferral, strict adherence to Section 1031and all of its requisites are imperative. Therefore, taxpayers must structure the transaction as an exchange of one property for another of “like kind”, as opposed to a sale for cash or other non-like property to reinvest into new property. Since 1921, tax-deferred exchanges have evolved from a simple but restrictive two-party swap of properties to today’s highly strategic and sophisticated exchanges. It is now possible for all taxpayers, large or small, to take advantage of this tax shelter.

Financial Leverage & Flexibility

When the tax liability in a transaction is deferred, the taxpayer has access to more capital for the acquisition of the replacement property. Thus, deferring taxes with a Section 1031 exchange provides the power of financial leverage. For any given property, an investor who can allocate all of this equity from that property has more purchasing power than an investor who loses a portion of his equity to taxes. This added purchasing power translates into the potential to increase appreciation, cash flow, and tax benefits as well.

The 1031 Exchange – Strategic Flexibility

There are many investment strategies the taxpayer can employ utilizing Section 1031. Here are a few examples: