What Qualifies for a 1031 Tax Deferred Exchange?

Suppose you own investment properties and desire to sell them off. In that case, a 1031 tax-deferred exchange can be a wealth-building tool to sell one investment property and purchase another. You can also defer taxes such as federal capital gains taxes, state capital gains taxes, and depreciation recapture. What are the qualifications for a 1031 tax-deferred exchange? Let’s review what they are and what investors must do to receive them.

What Is a 1031 Exchange?

A 1031 exchange falls under the header “Like-Kind Exchanges” in Section 1031 of the IRC. It involves exchanging “like-kind” real estate properties to defer numerous taxes. A 1031 exchange allows transactions to exchange your investment or income-producing property for another “like-kind.” This allows you to defer paying several tax liabilities. As long as the real estate is within the United States and used in business or held for income investments, it qualifies for 1031 exchanges.

Benefits of 1031 Exchanges

1031 tax-deferred exchanges offer many benefits to investors. Firstly, it gives investors more leverage to acquire a valuable investment property. By using money that would’ve gone to IRS taxes, they can increase down payments and improve overall buying power to achieve a higher-cost replacement property, leveraging their cash and building wealth through real estate investments.

Qualifications for 1031 Exchange

You must qualify for 1031 tax-deferred exchanges to move forward. 1031 exchanges are reserved for property held for productive use in a trade, business, or for investment.

Apartment buildings, vacant lots, commercial buildings, and single-family residences qualify for 1031 exchanges. The IRS has a complete list of those who meet the requirements, including trusts, C and S corporations, individuals, partnerships, taxpaying entities, and limited liability companies.

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