Answers To Common Questions About 1031 Exchanges

As a CPA and real estate attorney in a well-populated urban area, I have guided numerous clients through successful and profitable 1031 exchanges.

What is a 1031 exchange?

A 1031 exchange is also called a like-kind exchange and it is a great tool for individuals and small businesses to be able to exchange real property in an advantageous swap. A well-executed 1031 that meets all the requirements can mean that you will pay no taxes or pay limited taxes due at the time of the exchange.

What types of properties qualify?

Many types are eligible, including warehouses, commercial office space and residential rental units, among others.

Do vacation homes qualify?

In some cases, a vacation home that is also a rental for a significant amount of time (at least six months and preferably a year) may qualify, but these are not common.

Do residential houses qualify?

Typically, no. Homes used to qualify, but a new law makes it essentially impossible. The provision is for investment properties and business properties.

What are the advantages of using a 1031 exchange?

Every situation is different, but basically this allows you to take advantage of a hot market and to diversify. In some cases, patience is key: You exchange a strip mall for an old warehouse in an area that hasn't experienced gentrification. In 10 or 20 or maybe 30 years, the warehouse is now worth many times what it was valued at when you did the exchange (but the strip mall is only worth three times the original value).

What are the tax advantages to a 1031 exchange?

The provision allows you to defer capital gains taxes and to pass them onto the next generation. This also allows you to reconcile an aggressive versus passive approach when two family members disagree — you can diversify and satisfy both. It can be very beneficial in succession strategies.

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