According to Wikipedia, a 1031 Exchange is a way of structuring the sale of certain properties in such a way that you do not pay taxes on the gain of your sale. It is a terrific tool, I am told, by one of my colleagues who attended a Real Estate investment seminar with me last November.
In essence, when you sell a property, you either realize a gain or a loss. Losses can be deducted from your taxes to offset what you owe. Gains usually are hit hard because the sale of property is not a common occurrance such as the sale of a commodity. (How many houses do you buy in a year versus how many bars of soap, gallons of gas or jugs of milk?) Also, 1 deal can net you many thousands of dollars. I am being taught that in order to keep Uncle Sam off my back, roll my gains into another investment via a 1031 Exchange. It is named that because of the tax law it addresses.
Take care not to attempt this on your own! You will need a good lawyer, one who actually represents Real Estate investors or is an investor him/herself. A good tax accountant who won’t freak out if they see this in your documentation and a good closing agent who will handle your paperwork correctly.
-The Flipster
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While a 1031 exchange is a powerful tool to assist in wealth preservation, it is not always suitable as people age. According to the experts, 15 – 20 % of all exchanges fail and this represents ~ $30 Billion dollars in busted exchanges.
I thought you and your readers might like to know there is another way to defer your capital gains taxes (and depreciation recapture tax) without buying replacement property.
Please visit http://www.selltaxdeferred.com to learn more.
This can be used and I recommend seeking help on it as well. Keep it in the back of your mind on transactions.
[...] email has been bombarded with questions about 1031 Exchanges. Apparently, my post discussing this was somewhat of a huge hit. To date, I am still seeing hundreds of hits to this [...]