1031 Exchanges: A Tax Strategy Worth Knowing
Did you know a tax provision dating back to 1921 may allow you to sell an investment property, reinvest in another, and defer capital gains taxes?
It's called a 1031 Exchange. Here's how it works and why it may be worth considering.
So, How Does It Work?
A 1031 Exchange allows you to sell qualifying investment or business real estate and reinvest in another qualifying property while potentially deferring taxes on the gain.
A Simple ExampleImagine you purchased a rental property several years ago for $500,000, and today it's worth $1 million. Selling outright could trigger capital gains taxes. With a properly structured 1031 Exchange, you may be able to reinvest in another qualifying property and defer those taxes. Your actual gain depends on adjusted basis, depreciation and selling costs. |
Three Important Things to Know
01 — Property Use Matters
1031 Exchanges generally apply to properties held for investment or business purposes. Primary residences and vacation homes used primarily for personal enjoyment typically do not qualify.
02 — Timing Is Critical
You generally have 45 days after selling your property to identify a replacement property and 180 days to complete the purchase. The deadline may be shorter depending on your tax return filing deadline.
03 — Planning Ahead Is Essential
Talk with your tax advisor and engage a qualified intermediary before closing. The intermediary helps structure the exchange and holds the sale proceeds; receiving them yourself can disqualify the exchange.
THE EXCHANGE TIMELINE
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*The earlier tax-return deadline may shorten the 180-day period.
Why Might Someone Consider a 1031 Exchange?
It can offer flexibility while deferring taxes and keeping more of your equity invested.
Something Worth Remembering
A 1031 Exchange defers taxes; it does not automatically eliminate them. The rules are specific, so early planning matters.
If you are considering a 1031 Exchange, consult your tax advisor and a qualified intermediary before listing or closing on your property.
If you're thinking about your next real estate move in the Wood River Valley, we're always happy to be a resource and help you explore your options.
Kirsten DeHart & Heidi Bathum
WOOD RIVER PROPERTIES
Local Knowledge. Thoughtful Guidance.
