What is a Tax Deferred Exchange?
Normally when an investor sells a real estate holding for a gain, capital gains tax is due in conjunction with the sale. A 1031 exchange in real estate, sometimes known as a 1031x or tax-deferred exchange, offers investors the opportunity to defer payment of capital gains taxes on the gain on a sale of an investment property under certain conditions. Use of a 1031 exchange enables investors to keep a significantly greater amount of their capital invested and generating returns, since payment of tax liability is deferred.
While simplified, illustrates the power of a 1031 exchange. The ability under the tax law to defer payment of taxes enables an investor to have more capital invested than he or she would otherwise, and therefore enables higher returns on investment.
A 1031 exchange is fairly straightforward to accomplish. Section 1031 of the Internal Revenue Code lays out the guidelines that must be followed to execute a 1031 exchange. While there are a number of categories of assets that can be transacted under a 1031 exchange, the information that follows pertains only to real estate investment property.
