The 1031 Exchange: A Smart Move for Real Estate Investors & Business Owners

Written by Quianna Lewis, Kirstin Hawthorne and reviewed by Amanda Huegerich

A 1031 exchange is one of the best tools for those looking to grow their portfolios or upgrade business and trade properties while deferring capital gains taxes. Here’s a quick breakdown:

What Is a 1031 Exchange?

A 1031 exchange allows you to sell an investment or business-use property and reinvest the proceeds into another "like-kind" property without immediately paying taxes on the gain. Instead of losing profits to taxes, you can reinvest in your next venture.

Key Benefits

This strategy helps you:

• Build wealth faster by deferring taxes.

• Diversify your portfolio.

• Upgrade to properties better suited to your goals.

How It Works

A 1031 exchange can help you save on taxes and grow your wealth when these steps are followed:

• Sell Property: Sell your investment or business-use property and transfer the proceeds to a qualified intermediary.

• Find Replacement: Identify up to three replacement properties within 45 days.

• Close the Deal: Purchase a new property within 180 days.

• Follow the Rules: The new property must be for investment or business use, not personal.

Key Details to Remember

Both properties must be like-kind, meaning similar in use or nature. You’ll owe taxes on any leftover funds if you don’t reinvest the full sale amount. A third-party intermediary is required to handle the funds to meet IRS requirements.

Example

This example shows how the exchange works and how it can benefit your investment strategy.

• Sell a Business Property: $500,000 sale price with $150,000 in gains.

• Reinvest in New Property: Purchase a $550,000 property via a 1031 exchange.

• Result: Defer taxes on the $150,000 gain and reinvest fully into your next property.

Munson's Musings: Take Action

Thinking of selling an investment or business-use property? A 1031 exchange can help you save on taxes and grow your wealth. Contact us today to get started!