How to Use IRS Code 1031 with Real Estate

Did you know that you can defer paying the capital gains tax from a real estate sale? IRS Code 1031 allows you to defer paying taxes on a sale of an investment property as long as you purchase a property of equal or greater value in the next 180 days. Let’s examine exactly how you can take advantage of IRS Code 1031.

The Like-Kind Exchange

Under IRS Code 1031, an owner of investment property may defer capital gains if they buy another property of “like-kind” in a 1031 exchange. “Like-kind” simply means that property being exchanged must be of the same type.

For real estate, the interpretation of this definition is fairly broad. In theory, you could exchange an apartment building for an office complex, and this would still fall under the like-kind umbrella.

How to Use the 1031 Exchange for Real Estate Sales

To complete this type of exchange, you will need to designate the investment property you own and the real estate property you want to acquire. Remember, the property you will exchange for must be of a higher value than the one you currently hold.

Next, sell your real estate property. As noted above, you will only have 180 days to complete the exchange, so you will need to purchase the designated replacement property within this timeframe. Unfortunately, the deadline is hard and immovable for any reason, even if it were to fall on a holiday.

Remember, You Aren’t Avoiding the Capital Gains Tax, Just Deferring It

Once you have completed the exchange by buying the replacement property, you won’t have to record the new property you acquired for capital gains tax reasons until you actually sell the replacement property. This is a great way to defer the capital gains tax while your real estate property investment continues to increase in value.

If you have any questions regarding IRS Code 1031 exchanges or other real estate tax law matters, you should consult an experienced real estate attorney to be sure everything is done right.

Garland & Mason, L.L.C. – Real Estate Attorneys


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