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Understanding 1031 Exchanges:
A Guide for Real Estate Investors
If you own an investment property and are considering selling it to purchase another, it's important to understand the 1031 tax-deferred exchange. This process enables investment property owners to sell their property and acquire a like-kind property while deferring capital gains taxes.
What is a 1031 exchange?
A 1031 exchange derives its name from Section 1031 of the U.S. Internal Revenue Code. This provision allows you to defer capital gains taxes when you sell an investment property and reinvest the proceeds—within specific timeframes—into a like-kind property or properties of equal or greater value.
The role of qualified intermediaries
Under Section 1031, any proceeds from the sale of a property are subject to taxation. To avoid this, the proceeds must be transferred to a qualified intermediary instead of going directly to the seller. The qualified intermediary then transfers the funds to the seller of the replacement property or properties.
A qualified intermediary is an individual or company designated to manage the funds during the 1031 exchange, holding them until they can be passed on to the seller of the replacement property. Importantly, the qualified intermediary must not have any other formal relationship with the parties involved in the exchange.
1031 Exchanges are not just for “big” investors.
Whether you’re selling a single income-producing property or managing a portfolio of 100, a 1031 Exchange is for you.
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