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What is a 1031 tax-deferred exchange?

On Behalf of | Apr 30, 2022 | real estate law

As a rental property owner, there may come a time when you want to sell them and buy something new. When that times come, you could face serious tax issues.

Kiplinger explains there may be another option called a 1031 tax-deferred exchange.

The details

A 1031 tax-deferred exchange is a special deal where you and someone else trade properties of similar value. You avoid having to claim a loss or gain on your taxes. If you want to sell but buy something new, this can be the best way to do it and save some money. All you have to do is find another property owner looking to do the same thing.

Important notes

One thing to note is that you need to trade similar properties. This means that you trade business properties. However, you do not have to trade a rental unit for a rental unit. You could trade for another type of business as long as the values are similar. You cannot trade a business for personal property, such as a house that you will live in.

There is also a time limit for a 1031 tax-deferred exchange deal. You have 45 days to choose a property, and you must close within 180 days. You also cannot do a trade for a property that is not worth as much as yours. If you do and the other person gives you cash to supplement the deal, you must pay taxes on that cash.

It is essential to understand the details of a 1031 tax-deferred exchange before you jump into an agreement so that you can reap all the benefits without penalties.