What is a 1031 Exchange?
Join us as we begin our 1031 Exchange Series, where each day we’ll dive a little deeper into what 1031 Exchanges are and the insider tips and tricks you’ll need to know when it comes to participating in one.
1031 Exchange, you may have heard this term being thrown around by commercial real estate (CRE) professionals, a 1031 exchange or what is also know as the U.S. Internal Revenue Service Code 1031, states that investors of commercial properties can sell their property and reinvest those funds into a “like-kind” property. Allowing investors to “defer capital gain taxes as well as facilitate significant portfolio growth and increased return on investment,” according to Asset Preservation Incorporated.
This exchange or what is also referred to as a “rollover” is just that, by participating in a 1031 exchange you are rolling over the gains from your previous property onto a new investment property.
What is the Main Purpose of Participating in a 1031 Exchange?
According to Investopedia, the main purpose of participating in a 1031 exchange is to allow investors the opportunity to defer capital gains by selling their current property in order to purchase another, transferring gains from the old property over onto the new property, with no economic gain. The value used from the original property has not changed, per se, but instead has changed where the value is being held.
What is a “like-kind” Property?
This term at times is misinterpreted by investors, the term “like-kind” only means that the property you currently hold and the new property you intend on exchanging is the “same in nature or character, even if they differ in grade or quality,” according to Wikipedia. This relates to the use of both properties, a 1031 exchange is only applicable to properties that are used in a trade or business. This would overall include properties like; office spaces, apartments, retail, and land; primary residences do not apply to a 1031 exchange.
Again, participating in a 1031 exchange does have its limitations, not all real estate types can take advantage of this tax code. Your primary residence does not apply and neither does any commercial property that you are exchanging outside of the United States.
Properties that you’ve intended for resale also cannot participate in a 1031 exchange, this would mean that investors that purchase “flip” projects and then resell later on, would not qualify because, again, a 1031 exchange is meant for investments that you intend on holding onto, not reselling.
Want to learn more about 1031 Exchanges? Stay tuned, we’ll be blogging more about 1031 Exchanges in the days to come.
Read all the articles in our 1031 Exchange series here: https://www.mynoi.com/category/1031-exchange/