1031 Exchange: What is it and how does it work?

Range Certified Financial Planner
Range Certified Financial Planner
May 21, 2024

Looking to build your real estate empire?

The “1031 exchange” is a valuable tool for anyone in the investment property business. In short, a 1031 exchange allows you to sell an investment property  and reinvest the proceeds in a new property without having to pay capital gains taxes at the time of sale.

The power of the 1031 exchange lies in its ability to facilitate portfolio growth over time through continual reinvestment of capital gains. By deferring taxes, you can apply the full equity of your sale into larger or more valuable replacement properties with each exchange.

In theory (assuming the real estate marked doesn’t crash) this allows you to build wealth exponentially by riding appreciation waves and increasing cash flows. Used strategically, 1031 exchanges enable investors to build real estate portfolios that would have been difficult to achieve if you had to pay capital gains taxes with each transaction.

Of course, there are some important rules that apply:

  • You have to identify a replacement property within 45 days of selling your old one.
  • The purchase of this new property must be complete within 180 days.
  • The proceeds of the sale must be held in escrow. You can’t access them.
  • The properties in the exchange must be considered “like-kind”

Fail to meet these qualifications and—you guessed it—you’re hit with capital gains taxes. As anyone who has bought and sold homes can attest, this can have you walking a tightrope in terms of timing the sale and new purchase, as real estate deals can be drawn out or fall through.

If you’re currently considering buying or selling investment properties and have questions on how a 1031 works, connect with Range.

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