How a 1031 Exchange Works

A 1031 exchange, also known as a Starker exchange or a tax-deferred exchange, allows you to sell investment property and to defer capital gains and depreciation recapture taxes. This assumes reinvestment of 100% of the equity into "like-kind" property of equal or greater value. Any property held for investment purposes or for productive use in a trade or business generally qualifies as "like kind" property for 1031 exchange purposes.

1031 exchange rules require an investor to identify up to three potential "replacement" investment properties within 45 days of the close of escrow on their relinquished property. The acquisition of the replacement investment property (or properties) must be successfully completed within 180 days of close of the relinquished property.

In their 1031 exchange, many investors benefit from buying investment property as Tenants In Common (TIC) because it completes their exchange and can be closed in a timely manner due to pre-arranged financing.

The successful completion of a 1031 exchange is best facilitated by an investment consultant who specializes as a replacement property specialist.

 

Benefits of A 1031 Exchange 

A 1031 tax-deferred exchange offers strong benefits that translate into investment savings.

Defer Taxes

A 1031 exchange enables you to defer capital gains and depreciation recapture taxes. You can also harvest dormant equity at predictable time intervals with a 1031 exchange to maximize the inherent benefits of your real estate investments.

 

Potentially Increase Cash Flow

The tax dollars saved may be maximized to increase cash flow and overall net worth. The compounding effects of leveraging the equity in investment property over several holding periods can potentially produce higher actual dollar returns, new depreciation schedules to tax shelter cash flow, and accelerate equity accumulation.

Eliminate Day-To-Day Property Management

1031 exchanges structured as Tenants In Common interest ownership provide real estate investors a range of opportunities to meet personal investment objectives. This includes property type and geographic diversification, and, most importantly, the elimination of day-to-day property management obligations.