What is a 1031 Exchange?

A 1031 exchange, also known as a “1031 tax deferred exchange,” is a powerful tool under the U.S. tax code. In short, it allows real estate investors to swap one investment property for another. 

The main benefit is that it permits the investor to defer paying capital gains taxes on the property sold. That means if you own a property that has increased in value, you can sell it and use the proceeds to buy another property without immediately paying taxes on the profit. 

“No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment, if such real property is exchanged solely for real property of like-kind which is to be held either for productive use in a trade or business or for investment.”

So, what exactly does “like-kind” mean? Let’s break it down in an easy-to-understand way. The term “like-kind” in this context essentially means any other real estate property that’s also used for business or investment — not necessarily a similar type of building or quality.

This strategy is often used when properties appreciate in value over time. By deferring the tax, investors can leverage their entire sale proceeds to scale up or diversify their real estate portfolios without a tax penalty.

How To Do an Exchange

Many people learn by doing. So let’s take a look at a simplified example of an exchange in real estate. 

<span style=”font-weight: 400;”>Imagine an investor sells a property and has a $400,000 gain, leaving them with $400,000 after closing costs.

Normally, selling this property would cause a tax liability of about $140,000 due to depreciation, federal and state capital gains taxes, and net investment income tax. Unfortunately, this would leave the investor with only $260,000 to reinvest in a new property.

Now, if the investor uses this $260,000 as a 25% down payment and secures a loan for the remaining 75%, they could afford to buy a replacement property worth $1,040,000.

However, if the investor goes with a 1031 tax deferred exchange, they can reinvest the full $400,000 without paying immediate taxes on the gains. Using the same 25% down payment and 75% loan-to-value ratio, the investor could now purchase a replacement property valued at $1,600,000. That’s a huge difference!

Now, you’ve seen the real-world benefits of a 1031 exchange. By deferring capital gains taxes, real estate investors can use this tool to significantly grow their portfolios and increase their returns.

Asset Preservation, Inc. (API) Can Help With Your Exchange

To perform a 1031 exchange in real estate the right way, you need to work with a professional. And Asset Preservation, Inc. is one of the best exchange companies in the industry. 

Why?

Because we provide the API Advantage — meaning we offer the resources and expertise to make the exchange process completely compliant with all IRS regulations.

Asset Preservation, Inc. wants to work with you on your next exchange. We’ve been doing this since 1990 and have performed over 200,000 tax deferred exchanges. 

Give us a call at 866-374-7157 or Start a 1031 Exchange Online with API today.