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!
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