What is a 1031 Exchange?
Under normal circumstances, when you sell a property you have to pay tax on the gain. Gain is caused by taking depreciation deductions for tax purposes or by the property appreciating in value during its ownership.
A Section 1031 tax deferred exchange, named for the Internal Revenue Code Section it refers to (also known as a Starker Exchange, Tax Free Exchange, or Like-Kind exchange), allows an exception to the capital gains tax. When you sell your business or investment real estate, replace it with a different business or investment property, and complete an exchange, you can defer payment of the capital gains tax normally required on these sales.
If your plans include using the money from the sale of a business or investment property to buy more of the same, a 1031 Exchange provides greater proceeds for your next investment-more than you could gain through the re-investment of after-tax proceeds.
A 1031 Exchange is not a tax loophole. The Tax Deferred Exchange ("1031 Exchange"), as defined in Section 1031 of the Internal Revenue Code of 1986, as amended, and Section 1.1031 of the corresponding Treasury Regulations, as amended, offers real estate investors one of the last remaining and best tax strategies for preserving the value of an investment portfolio and building wealth. By completing a 1031 Exchange, the investor ("Exchanger") can dispose of their investment property, defer the recognition of capital gain taxes that would ordinarily be paid, and leverage all of their equity to acquire replacement investment property.
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