Understanding 1031 Exchanges: A Key Tax Planning Strategy
At Linked Accounting, we work with many clients in real estate, and one of the most valuable tax strategies we recommend is the 1031 exchange. This allows investors to defer capital gains taxes by reinvesting proceeds from a property sale into another qualifying real estate investment.
A 1031 exchange works similarly to a 401(k) plan, keeping your money invested rather than paid out in taxes. However, the deferred taxes will still be due one day, and future tax rates are unpredictable. Our general advice is to take advantage of a 1031 exchange if you don’t need the proceeds for non-real estate purposes.
Key Rules for a 1031 Exchange:
- Do not take possession of the cash from the sale, your title company must retain it in escrow.
- You have 45 days to identify a new property after selling your existing one.
- You must close within 180 days of selling your prior property.
- To defer all capital gains tax, your new property must be of equal or greater value, and all sale proceeds must be reinvested.
A reverse 1031 exchange (purchasing a property before selling your current one) is possible but complex. If you're considering this, reach out to us to discuss your options.
Tax law changes often. This is general information, not advice for your specific situation. Talk with us before you act on it.