Did you know you can defer capital gains tax on the sale of your investment property? It’s called a 1031 Exchange. When used properly, a 1031 Exchange can allow a buyer to fully leverage his/her money.
There can be a lot of misinformation about 1031 Exchanges. Let’s debunk a few misconceptions...
Like Kind Property
Let’s say you are selling an apartment building. Does that mean your replacement property has to be an apartment building? No, it does not.
The IRS 1031 Exchange regulation states, “all real property is like-kind to all real property.” If you are selling an apartment building, you can buy a single family home. If you are selling a condo, you can buy an office unit.
Sell One, Buy Many
Let’s say you are selling one investment property. If you do a 1031 Exchange, you can buy more than one replacement property. Just because you sell one property does not mean you can only buy one replacement property.
Reinvest
You are not required to reinvest all your gains. However, you will be taxed on the gains that are not reinvested. An investor might not reinvest all their gains because he/she might need to money for something else. Everyone’s situation is different. For the 1031 Exchange transactions I have been on, the buyers reinvest ed all their gains.
-Roda