How You Can Use a Section 1031 Exchange to Defer Taxes Indefinitely

How You Can Use A Section 1031 Exchange To Defer Taxes Indefinitely

Published On: July 8th, 2018Last Updated: July 8th, 2018Categories: Investing, Investment, Investment Properties, Lawyers, TaxesTags: , ,

Real estate investors can use IRC Section 1031 to postpone paying tax on the gain if they reinvest the proceeds in a similar property. This doesn’t mean that it’s tax-free, but it does postpone the tax. Plus, they can defer indefinitely if they’re smart about it. Real estate investors use this to grow their portfolios and increase the actual return on investment.

To do this you’ll need to know all the details of the Section 1031 code though, and should consult with an expert.  Here’s the thing: Too many people assume that they can’t use Section 1031 because they think it means that they must re-invest in the exact same type of property. Really though, the definition of like-kind is very liberal.

If you do it right, you can roll over the gain from one rental property to another better rental property. Even if you make a profit on the first property, you can avoid paying the capital gain tax on it indefinitely. See, you won’t pay the tax until you sell for cash.

In a delayed Section 1031 exchange, you must get a middleman to act as the Qualified Intermediary. They hold the cash after you sell the first rental property and will use it to purchase the replacement property. That way, it’s treated as a swap. Look, you can’t actually receive the cash. It has to go right to the Qualified Intermediary. Plus, you will have 45 days from the sale of the first property to designate the replacement property. You will have to make that designation in writing to the intermediary though. You don’t have to pick just one property, you can choose three. You just have to make sure that you close on one of the new investment properties you designated. Sometimes you can even designate more than three. Consult with an expert for those details.

The next stipulation for delaying the tax indefinitely is that you have to close on the replacement rental property within six months! See, after you sell the old property, you have 180 days to close on the second. That’s not 180 days from designating the new property, that’s 180 days from the sale of the old property. As an attorney specializing in real estate for more details. Many investors repeat this process over and over, growing their portfolio, for the rest of their lives never paying capital gains tax on any of the properties.

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