How to Avoid Paying Capital Gains Taxes : 1031 Exchange Explained
What is it?
1031 Exchange is a legal way to defer paying taxes on the profit from the sale of a property.
How Does it Work?
A 1031 exchange gets its name from Section 1031 of the U.S. Internal Revenue Code, which allows you to avoid paying capital gains taxes when you sell an investment property and reinvest the proceeds from the sale within certain time limits in a property or properties of like kind and equal or greater value.
What Property Qualifies For A Like-Kind Exchange?
Both the relinquished property you sell and the replacement property you buy must meet certain requirements. Both properties must be held for use in a trade or business or for investment. Property used primarily for personal use, like a primary residence or second/vacation home, does not qualify for like-kind exchange treatment.
What Must You Do to Defer Paying Taxes?
Step 1: Once the sale of the property occurs, the funds are kept by a trustee/intermediary who will receive the cash.
Step 2: Seller will have 45 days from the sale of their property to identify a link-kind property to purchase, "in writing to the intermediary".
Seller can identify multiple like-kind properties
Step 3: Seller must close on the purchase of the new property(s) within six months from the sale of the original property
180 days after the sale date of the original property