1031 Tax Deferred Exchanges
First, a 1031 tax deferred exchange is when you exchange one property for another in order to DEFER the payment of capital gains tax. It is not an exemption and eventually the taxes may have to be paid. It is a great method for asset accumulation. An exemption is better than deferral. For example, living in the property as your primary residence for the last two out of five years, but that’s another topic.
Second, LIKE-KIND DOESN'T MEAN IDENTICAL. To further explain, the properties being exchanged don't have to be the same type (i.e. single-family(SFR) for SFR or duplex for duplex). The USE of the property must be the same. The typical use would be investment, so if you're trading an investment property for an investment property, it qualifies as a 1031 exchange.
Lastly, the common misconception that the replacement property MUST be of EQUAL or GREATER value is incorrect. A 1031 exchange can be all or partial. Meaning if the relinquished property is worth more than the replacement property and the seller has leftover funds (boot) it still qualifies as a 1031 exchange. The seller would only have to pay taxes on the “boot” amount, rather than the full sale price. One additional tidbit, the amount of debt owed on either relinquished or replacement property does not affect the amount of capital gains tax paid.
For any questions regarding 1031 exchanges, please give me a call or e-mail me.