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1031 Exchanges: What You Need to Know

How can I use a 1031 exchange to avoid capital gain taxes?

Section 1031 of the Internal Revenue Code allows for investment property owners to essentially swap one investment asset for another without having to pay capital gain tax.  This underutilized section of the tax code can have significant benefits for investors.  With the help of a California tax planning attorney, investors can save thousands by rolling over their gains to the next investment.  The following is a look at some key concepts surrounding 1031 exchanges.  For individualized help with your tax planning, contact our tax planning attorneys at Brunoro Law.

1031 Basics

The 1031 process is best understood as a rollover.  By executing a 1031 exchange, you can rollover gains from one investment into another investment without paying capital gains tax.  This tax is essentially deferred, and will continue to be deferred until you sell the investment for a cash profit.  Other rules to know include:

  1. 1031 Applies to Investments, Not Personal Residences:  1031 is used for investment and business property.  You cannot use the law to swap your personal residence for another, but you may be able to convert your residence to an investment and then complete a 1031.
  2. Property of Like-Kind is Interpreted Broadly:  The 1031 rule requires that you exchange your investment for one of a “like-kind,” but this provision is interpreted broadly.  You may be free to exchange your home for land, commercial property, and more.
  3. Exchanges Can Be Delayed:  Most 1031 exchanges are delayed, meaning that the funds from the sale of your property will be held by a middleman or intermediary while you seek an exchange property.
  4. You Must Close Within Six Months:  When your property sells, you will have 180 days to close on the new property.  During this time, you will need to designate up to three properties within 45 days of the closing; then you will have the remaining 135 days to close on at least one of them.

All investors should explore the 1031 laws to determine whether they may benefit from conducting a 1031 exchange.  Interested investors should consult with our tax planning attorneys for more information.

Posted in: Tax Planning

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