When it comes to selling an investment property and wanting to defer capital gains taxes, a 1031 Exchange can be a powerful tool.

But what is the best way to break it down? It’s all about timing.

Defer Your Capital Gains With a 1031 Exchange

Are you looking to sell real estate held for investment? The Internal Revenue Code (IRC) offers you one of the most important tax planning strategies to help preserve and grow your investment portfolio. Through a transaction called a 1031 Exchange, you can defer the capital gains taxes that arise from the sale of real estate.

What Is a 1031 Exchange?

Whenever you sell a business or investment property and you make a profit, you generally have to pay capital gains taxes. A 1031 Exchange allows you to sell your real estate property, reinvest the proceeds in “like-kind” real estate, and defer the payment of taxes on that sale. The Internal Revenue Service (IRS) defines like-kind as property that is similar in nature or character, regardless of differences in grade, property type or quality.

For investors, a 1031 Exchange offers a range of potential benefits:

• Tax deferral
• Diversification
• Tax-advantaged cash flow
• Wealth preservation

The Rules & Timing of a 1031 Exchange

To successfully complete a 1031 Exchange and defer your capital gains liability, you must follow very specific requirements over a strict 180-day timeline.

Day 1: Sell

This is where the sale of your property takes place. Then, the proceeds are in escrow with a QI.

Sell your property; proceeds are escrowed with a Qualified Intermediary (QI).

Day 45: Identify

By this point, you will need to identify another property.

Identify a property within 45 days.

Day 180: Close

You close on your new property by this day.

Close on your new property within 180 days of the sale of the relinquished property.

Additional Requirements

In addition to the timing considerations, a qualifying exchange requires you to:

• Purchase a replacement property of equal or greater value
• Reinvest all equity
• Obtain an equal or greater amount of debt on the replacement property

Failure to satisfy these requirements will create a tax liability.

The 8 Steps of a 1031 Exchange

1. Sell Property
2. Give Capital Gains to Qualified Intermediary
3. Identify Like-Kind Property Within 45 Days
4. Send Duty Letter to Qualified Intermediary
5. Negotiate With Seller of Like-Kind Property
6. Agree on a Sale Price
7. Have Your Intermediary Wire Capital Gains to Titleholder
8. Fill Out Form 8824

Section 1031 of the IRC

“No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment.”

Source: IRS Tax Code.

Go Deeper

For a more detailed, extensive look into 1031 Exchanges, the timeline and requirements above offer guidance and further information.

Infographic courtesy of Inland Investments; cited in A View Into the World of Alternative Investments | Panorama Financial Group.

If you’re considering a 1031 Exchange and want help mapping the timeline to your own sale, reach out to Austin Wealth Specialists.

---

Disclosure: Securities offered through Great Point Capital, LLC, Member FINRA SIPC. Investment Advisory Services offered through Vann Equity Management. Great Point Capital LLC, Vann Equity Management, and Austin Wealth Specialists are separate and unaffiliated. Educational only and not a recommendation or offer. Investing involves risk, including possible loss of principal. Not tax or legal advice. Consult your tax and legal advisors about your specific situation.