What is 1031 Exchange


What is 1031 Exchange

A 1031 exchange is a transaction tool that real estate investors can use to defer capital gains tax, increase return, and add to an estate plan for transferring assets.


A 1031 exchange allows a real estate investor to sell a piece of investment property and if they plan on reinvesting the proceeds into another property, they can defer all the capital gains tax due from the sale property if they structure the exchange correctly. The IRS has outlined the statutory requirements to complete a correct exchange in Internal Revenue Code (“IRC”) Section 1031:
“No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment, if such real property is exchanged solely for real property of like-kind which is to be held either for productive use in a trade or business or for investment.”

Any gain earned on the sale of real estate held longer than one year is normally subject to long-term capital gains tax. If an investor structures a 1031 exchange, then they defer payment of capital gains tax and use the entire amount of gain to invest in a new property. If the investor passes a 1031 property over to their heirs, then the heirs receive the property at a stepped-up basis.