Who Can Use a 1031 Exchange?

Regarding commercial real estate, investors employ various strategies to maximize their returns. One such approach is the 1031 exchange. However, only some are eligible to use it.

Let’s break down who can use a 1031 exchange and what benefits it brings to Commercial Real Estate:

1. Who can use a 1031 exchange?

A 1031 exchange is available to any real estate investor who owns commercial property. That means only property used for commercial/industrial purposes can qualify for a 1031 exchange.

Internal Revenue Code §1031 states that property relinquished and acquired in a tax-deferred exchange must be held by the taxpayer “for productive use in a trade or business or for investment.” So, the asset you are selling must have been held for some period of time.

Additionally, you must complete the exchange within a specific timeframe, known as the exchange period. The exchange period starts when you close on the property you’re selling and ends 180 days later. During that time, you must close on the property you’re buying or properties if you’re doing a multi-property exchange.

2. What does it do for me?

A 1031 exchange allows you to defer taxes on the capital gains from the sale of an investment property. Capital gains tax is a tax on the profit you make when selling an asset, in this case, a real estate investment.

Usually, you must pay taxes on the capital gains when you sell, but a 1031 exchange postpones that payment. By deferring taxes, you can use the profits from the sale to invest in another property and potentially generate more cash flow or appreciation.

By continually using 1031 exchanges, you can reinvest your profits tax-free, allowing your portfolio to grow dramatically over time.

3. Why would I use it in the first place?

The primary reason someone would use a 1031 exchange instead of other tax-deferral options, like an Opportunity Zone investment or a charitable trust, is flexibility.

With a 1031 exchange, you can control the property you invest in and its location. With an Opportunity Zone investment, you’re limited to specific geographical areas; with a charitable trust, you’re giving up ownership entirely.

Another benefit of using a 1031 exchange is you can defer taxes indefinitely. For example, if you never sell your investment properties or pass them on to your heirs, you’ll never have to pay taxes on the capital gains.

Additionally, 1031 exchanges can help you diversify your portfolio by allowing you to exchange one property for several.

A 1031 exchange is valuable for any real estate investor with investment property. Not only does it allow you to defer taxes on capital gains, but it also provides flexibility, control, and diversification in your investment portfolio.

If you’re interested in using a 1031 exchange, we can help you understand the process better, make the most of your investment properties, and create a path towards financial freedom.


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