What Is A 1031 Tax Exchange?
In the normal real estate transaction the property owner is taxed on any gain from the sale. Through a 1031 tax exchange the tax is deferred until a future date.
Section 1031 of the IRS code states that no loss or gain shall be recognized on the "exchange" property held
for productive use in a trade or business, or for investment. This is a method where a property owner trades one or more properties for one or more replacement properties of like kind, while deferring payment of taxes.
The idea behind a 1031 is when a property owner reinvests the sale proceeds into another like kind property the economic gain has not been realized in a way that generates funds to tax. Put another way the taxpayers investment remains basically the same, only the form has changed (i.e. vacant land is exchanged for a multi family property). Therefore, it would be unfair to force him or her the taxpayer to pay tax simply on a "paper" gain.
What Qualifies For A 1031 Tax Exchange:
In this area confusion often sets in. To put it very simply, any type of real estate used for business, trade or investment purposes will qualify. Examples could be: office buildings, duplexes, single family, apartments, condo, rentals, raw land, farms, industrial and multiplexes.
You are not limited to exchanging for property exactly like your present property. The IRS code and law allows you to trade raw land for an apartment and vice versa as long as you structure it as an exchange.
Notes:
While we certainly did not touch on all the facets of the 1031 tax exchange I hope it gave you some insight on how the exchange works. Investors use this path all the time to build wealth and grow from smaller investments to larger ones over time. If you any further questions about the 1031 tax exchange process feel free to contact us or if your looking to sell and trade into something else and you're looking for a local Minneapolis Realtor to assist let us know.