This is the mental math I did when I first heard about the notion of a 1031 exchange: (Has to do with taxes + seems like older male investors use it) x (taxes are boring/complicated) = (Makes me feel stupid/I’ll learn about it another day)
Well, people, that day has come and past! I am now quite familiar with 1031 exchanges because I have two different clients who are in the middle of them. With that said, I’ll do my best to break it down for you and take some of the mystique out of 1031 exchanges.
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Who is a 1031 Exchange Relevant For?
A 1031 exchange is mostly relevant for people with a rental property. (I’ve heard about work arounds for fix and flips and other types of properties, but that’s beyond the scope of this article.) So, back to the basics: 1031 exchange is relevant for people who want to use the proceeds from the sale of one rental property to purchase another rental property.
Why Would I Use a 1031 Exchange?
The purpose of a 1031 exchange is to defer paying 15 percent taxes on capital gains. So, if you sell a property and you’ve made some money on it, you pay 15 percent on your gains. If you defer your money by using a 1031 exchange, you don’t have to pay those taxes as long as you roll that money into another investment (rental) property. (And, yes, this is the government encouraging you to buy real estate.)*
Note on this, the…