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After working in the mortgage business for a long time, I've learned that investing in real estate isn't just about finding good properties. It's about knowing how to use financial tools to keep more of what you make. The 1031 exchange is one of the most powerful and least understood ways to build wealth through real estate.
This is how you should think about it. You've put a lot of effort into making an investment property worth more. Maybe the area got better, rents went up, or you made smart changes that made the property worth more. But here's the catch: as soon as you sell, the IRS will take a big chunk of your profit in the form of capital gains taxes. According to IPX1031's IRS inflation adjustments for 2025, if you are single and make more than $533,401 or married and file jointly and make more than $600,051, you could lose 20% of your gains to federal taxes alone. If you make a lot of money, you also have to pay the 3.8% Net Investment Income Tax, which means that almost a quarter of your profit will go away.
This isn't some secret loophole that only people on Wall Street know about. This is a legal, IRS-approved way that regular real estate investors have used for decades to make a lot of money. A 2021 Ernst & Young study found that 1031 exchanges bring in about $25 billion in tax revenue each year through job creation and economic activity. This is ten times more than what the government would get if they got rid of this provision, according to 1031 CORP's 2025 analysis.
But what's most important to you is figuring out if a 1031 exchange is right for you, how to deal with the strict rules, and what strategies work best in the current market.
You can sell an investment property and use the money to buy another property of the same kind through a 1031 exchange. This is named after Section 1031 of the Internal Revenue Code. The important word is "defer," not "eliminate." You're putting off paying the tax bill, not getting rid of it completely.
If you buy a house for $300,000 and then sell it for $500,000, you make a $200,000 capital gain. You would normally have to pay capital gains tax on that $200,000 profit. But if you do a 1031 exchange, you can put all of that $500,000 into a new property without having to pay taxes right away. The tax debt goes to your new property, and you only have to pay it when you sell it without doing another exchange.
It's important to remember that you don't directly handle the money from your sale. A qualified intermediary, a neutral third party who handles the money during the exchange process, must keep the proceeds. You can't change this. The IRS thinks that any money you touch, even for a second, is taxable income, and you can't exchange it anymore.
Most people don't know that the word "like-kind" means more than they think. For example, you don't have to trade one apartment building for another. IPX1031's 2025 trends report says that most real estate held for business or investment purposes is like-kind property. You could trade a single-family rental home for a multifamily apartment complex, a retail storefront for industrial warehouse space, vacant land for a developed commercial property, or a duplex for a triple-net lease property.
The most important thing is that you can't use either property for personal reasons; they must be used for business or investment purposes. Your main home and your vacation home don't qualify, unless they meet certain rental requirements that we'll talk about later. Properties in the US are not the same as properties outside of the US.
There are some types of exchanges that Section 1031 doesn't cover. Your main home doesn't count. Second homes that are mostly for personal use are not included. This rule says that you can't trade stocks, bonds, or other securities. Partnership interests, trust certificates, and property that a dealer has for sale also don't count.
The timeline is the part that even experienced investors have trouble with. These aren't flexible rules; they're strict deadlines set by the IRS. If you miss them, you'll lose your tax deferral completely.
You have 45 calendar days from the day you close on selling your relinquished property (the one you're giving up) to write down potential replacement properties. Not days of business. Not about six weeks. For exactly 45 days.
This identification needs to be very clear. You can't just write a nice duplex down in Phoenix. You need to give either a legal description or the street address of each property you might want to buy. You need to sign this document and give it to either the seller of the new property or your qualified intermediary.
You can choose from three different types of identification. With the Three-Property Rule, you can find up to three properties of any value. The 200% Rule lets you name as many properties as you want, as long as their total value is no more than 200% of the value of the property that was sold. The 95% Rule lets you find as many properties as you want, regardless of their value, but you must buy properties that are worth at least 95% of the total value you found. For the sake of simplicity, most investors stick to the three-property rule. It lets you be flexible without having to do complicated math.
You have 180 days from the day you sell your old property to close on your new one, or until the due date for your tax return that year, including any extensions.
This is a situation that surprises a lot of people. For example, you sell your investment property on November 15, 2025. December 30, 2025, is the last day you can identify yourself. May 14, 2026, would be your last day to close. If you don't ask for an extension, your tax return is due on April 15, 2026. This means that you only have until April 15 to finish the exchange, not May 14.
Northmarq's 2025 exchange analysis shows that many successful investors now use dual tracking, which means they market their old property while also looking for new ones to buy. This parallel approach helps keep control and timing, especially in competitive markets where good properties sell quickly.
It's one thing to know how things work. The real value is in knowing when and how to use a 1031 exchange. Here are seven strategic situations in which a 1031 exchange can greatly help your investment portfolio.
Managing three separate single-family rentals in different neighborhoods? You can sell all three and use the money to buy a bigger apartment building through a 1031 exchange. This plan makes your life a lot easier: instead of three mortgages, you only have to deal with one property manager and one roof to keep up.
More and more people are using this method in 2025. IPX1031's market survey found that investors are moving away from properties that require a lot of management and toward passive investment structures like triple-net lease properties and Delaware Statutory Trusts, which need very little landlord involvement.
You own three single-family homes that are each worth $200,000. Together, they are worth $600,000 and bring in about $36,000 a year in net operating income. You could trade for an eight-unit apartment building worth $600,000 that makes $48,000 a year with professional management already in place. You make $12,000 more a year and have a lot less trouble managing things.
You might have bought in a market that has cooled off, or you might have found new areas that are likely to grow faster. You can move your money without paying taxes with a 1031 exchange.
Exclusive Financial Resources' analysis of the industry for 2025 shows a clear trend: investors are moving away from office buildings, which are still having problems because of remote work, and into multifamily, industrial, and neighborhood retail. These asset classes have better fundamentals and room to grow. There is also more 1031 investment activity in areas that are good for retirement, have lower living costs, and have warmer weather.
The change makes sense. Why keep your money in a market that isn't growing when you can move it to a place with better job growth, rental demand, and demographic trends?
A 1031 exchange can help you reset the clock on depreciation, which is something that many investors don't know.
You can depreciate residential rental property over 27.5 years and commercial property over 39 years, according to the IRS. If you've owned a property for a long time, your annual depreciation deduction may have gone down or even gone away completely. When you trade in a property, you get a new depreciation schedule based on the value of the new property.
This is even more powerful if you've seen your value go up. You bought a house for $300,000 fifteen years ago, and now it's worth $500,000. You've spent a lot of your depreciation. You now have a new depreciation schedule based on the higher value of the $500,000 property you traded in for. This means you can take bigger tax deductions in the future.
This one needs a lot of thought, but it's becoming more and more possible. The IRS has certain rules for people who want to turn their vacation home into an investment property and then sell it.
IPX1031's strategic home buying guide says that to be able to do a 1031 exchange on a vacation home, you have to own it for at least two years, rent it out at market rate for at least 14 days a year for the last two years, and use it for personal use for no more than 14 days or 10% of the rental period each year, whichever is greater.
You can trade the property for another investment property once it meets these requirements. This strategy has become more popular as local governments put limits on short-term rentals. As a result, owners of residential investment properties have to either switch to long-term rentals or trade their properties for traditional apartment buildings that have fewer rules.
Sometimes the best thing to do is not to consolidate. You can trade in one big property for several smaller ones to get a wider range of property types or locations.
For example, you could sell a $1.2 million commercial building in one market and buy four $300,000 properties in different cities or even states. This diversification lowers your risk if one local market has economic problems.
There are some interesting chances here because of the 2025 market. According to recent surveys of investors by IPX1031, 11% of home buyers are buying homes specifically to diversify their portfolios and build rental properties for passive income. Additionally, 62% of rental property buyers plan to use a 1031 exchange to delay taxes and get the most out of their reinvestment.
Not all exchanges are just about money. Some investors use 1031 exchanges to make sure that their real estate investments fit with their plans for the future.
You might sell your properties in cold places and buy similar ones in warmer places where you want to retire. Or switch from managing multifamily properties to fully passive triple-net lease investments as you get closer to retirement and want to cut down on your management duties without having to pay a huge tax bill.
A May 2025 IPX1031 survey of more than 1,000 potential home buyers found that investors are increasingly seeing vacation homes as strategic assets—properties that can make money through rentals now and possibly become primary residences later, with 1031 exchanges making these long-term plans easier to carry out.
The reverse exchange is a strategy that has become very popular in the competitive world of 2025. In a normal exchange, you sell your current property first and then buy a new one. In a reverse exchange, you close on your new property before selling your old one.
What would make you do this? IPX1031's industry reports for 2025 show that reverse exchanges are becoming more popular because there aren't many properties available. When you find a great replacement property that has a lot of offers or needs to close quickly, a reverse exchange lets you buy that property without having to worry about selling your current one first.
The mechanics are different. An exchange accommodation titleholder, who is often your qualified intermediary, must transfer the replacement property. This person will hold title until you sell the property you are giving up. You still have to find the property you gave up within 45 days and sell it within 180 days, but the order is different.
Let's do some math so you can see how it really affects things. This is when the benefits of a 1031 exchange become very clear.
Think about how much you paid for an investment property ten years ago: $300,000. Your adjusted basis is now $350,000 because you've made $50,000 in capital improvements over the years. You also claimed $90,909 in depreciation deductions, which is $10,909 per year for a rental home. This brings your adjusted basis down to $259,091.
You sell the house for $600,000 today. To figure out your taxable gain, subtract your $259,091 adjusted basis from the $600,000 sale price. This gives you $340,909.
According to Kiplinger's 2025 capital gains tax analysis, here's how the taxes work out for a married couple filing jointly with income that puts them in the 15% long-term capital gains bracket:
Tax Part Calculation Amount
$37,500 in capital gains tax on $250,000
Recapture of Depreciation: 25% on $90,909 = $22,727
Net Investment Income Tax: 3.8% of $340,909 (if applicable), or $12,955.
Federal Tax Total: $73,182
You'd owe $73,182 right after closing. You would also have to pay state income tax on the gain in many states. The Entrust Group's state tax analysis for 2025 says that states like California tax capital gains as ordinary income up to 10.75%. This could add another $36,598 to your bill, bringing your total tax bill to over $109,000.
Let's now look at the same situation with a 1031 exchange. You sell for $600,000, but instead of paying $73,182 or more in taxes, you use the whole $600,000 minus closing costs to buy a new property worth $650,000. You can put $600,000 down from your exchange and borrow $50,000.
What do you owe in taxes? Nothing for now. The $73,182 you would have given to the IRS is still in your new property, where it is working for you. This new property goes up in value and makes money over time. You can keep doing this strategy for decades, going through many exchanges and putting off paying taxes while you build wealth.
This is where some investors make mistakes. If you get any boot during the exchange, like cash or property that doesn't qualify, that part is taxable.
There are many ways that boot can happen. If you get cash back from the transaction, that's called cash boot. If your new home has a smaller mortgage than your old home, you will have to pay a mortgage boot. If you get things that aren't real estate as part of the deal, you get a personal property boot.
Your new property must be worth the same as or more than the property you gave up, and your new debt must be worth the same as or more than the debt you're paying off. Anything left over is taxed.
This is an example. You sell a house with a $200,000 mortgage for $500,000. You want to trade for a house that costs $450,000. The $50,000 difference is "boot," and you'll have to pay capital gains tax on that amount. If your new mortgage is less than $200,000, you would also have to pay taxes on any debt relief.
Not every 1031 exchange is set up the same way. Knowing what your options are will help you pick the best way to handle your situation.
When most people talk about a 1031 exchange, this is what they mean. You sell your old property first, and then you have 45 days to find a new one and 180 days to close on it. In the meantime, the qualified intermediary will keep your money.
According to experts in the field, this is how about 90% of all 1031 exchanges are set up because it's simple and real estate professionals know how it works. The hard part is finding and closing on a good replacement property within the tight deadlines.
As we talked about before, reverse exchanges let you buy a new property before you sell your old one. In 2025's competitive market, this structure has become much more popular.
Because of the extra paperwork and the fact that the intermediary needs to hold title, the logistics are more complicated and usually more expensive. But a reverse exchange can be very helpful when you've found the perfect replacement property that won't wait.
This option, which isn't as well known, lets you use the deferred tax dollars from the sale of your property to make improvements or build on your new property. All building work must be done within the 180-day exchange period, which means that careful planning and quick action are required.
Windhambrannon's 2025 study says that build-to-suit exchanges are a good option for investors who find a property that is undervalued and needs repairs. You could buy a $400,000 property and use your exchange funds to make $150,000 worth of improvements. This would make the property worth $600,000 or more, and you wouldn't have to pay capital gains taxes on the money you made.
What's the catch? Delays in construction can stop the whole exchange. Any work that isn't done within 180 days can't be counted toward the exchange value. This could lead to boot and taxes.
For a successful 1031 exchange, your qualified intermediary is very important. This person or company makes the exchange happen by keeping your sale money and making sure you follow IRS rules. You can't act as your own intermediary, and the IRS says that some people who are related to you can't do this, such as your real estate agent, lawyer, accountant, or family members who have worked with you recently.
A good qualified intermediary takes care of many important tasks. They make the agreements and exchange documents that set up the structure of the exchange. They work with closing agents to make sure that all the paperwork is in order for both the sale of the old property and the purchase of the new property. They keep exchange funds in a separate, safe account, preferably one that is FDIC-insured. They keep an eye on your 45-day identification and 180-day purchase deadlines to keep track of when things are due. They give out money by giving it to the right people when you close on your new property. They keep records and full documentation for your records and for reporting to the IRS.
Not all qualified intermediaries are the same. Look for someone who has worked in real estate. Have they done exchanges like yours before? Do they know what kinds of properties you're working with? Make sure they are financially stable. Are your money in accounts that are protected by the FDIC? What protections are in place for your money? Keep in mind that qualified intermediaries aren't regulated like banks, so it's important to do your homework.
Check their history of following the rules. Have they passed compliance tests like SSAE 18, the new accounting standard? Look at how clearly they talk to each other. Can you check on your exchange status whenever you want? Do they let you know about deadlines ahead of time? Think about how long they've been in the business. How long have they been helping people trade? Newer companies may charge less, but when it comes to following IRS rules, experience is important.
The costs are very different, but they usually range from $800 to $2,500 or more, depending on how complicated your exchange is and what services are offered. Don't come here to look for deals all the time. If you make a mistake here, you could lose tens of thousands of dollars in tax deferral.
Let's go over the steps so you know what to expect.
Before you list your property, you should first decide to do a 1031 exchange. You need to make this choice before you sell your house, not after. You can't start a 1031 exchange after the sale is closed. Ask your tax advisor if an exchange makes sense for you. If you sell without an exchange, figure out how much tax you might have to pay. If you have a big tax bill and want to keep investing in real estate, a 1031 exchange is probably a good idea.
Next, pick your qualified middleman. Before you put your property up for sale, do some research and choose your qualified intermediary. Before you close on the sale, you need to have an exchange agreement with the middleman. Talk to more than one person. Find out how familiar they are with your type of property, how they keep your money safe, what their fees are, and how available they are to answer your questions during the exchange.
Next, make a list of the property you gave up and sell it. Just like you would normally do, work with your real estate agent to sell your home. The most important thing is that your purchase and sale agreement must say that you are doing a 1031 exchange. Your qualified intermediary will give you this language and work with the closing agent to make sure the money is handled correctly. The money goes straight to your intermediary at closing. You never get to touch the money.
Now find replacement properties within 45 days. This is where the stress is. You have 45 days from your closing date to write down possible replacement properties. Be smart, but also realistic. Using the three-property rule, a lot of investors choose three properties so they have options. Each identification should have either the full street address or the legal description. Send your identification in writing, usually by certified mail or email, to your qualified intermediary as your intermediary tells you to. A few days before the deadline, not on day 45, do this. Things can go wrong, so you want extra time.
You should be doing due diligence on your top choices at the same time as you are looking for properties. This includes checking out the property, doing an environmental assessment for commercial property, looking up the title, going over the rent rolls and operating statements, checking out the local market, and getting financing if you need it. Keep in mind that you have 180 days to finish. Every day matters.
You have to choose one of the properties you listed as your replacement property. Work with both the seller and your lender to close as soon as possible, but make sure to do all the necessary research first. Your qualified intermediary will work with the closing agent to make sure your exchange funds go to the purchase. Your new mortgage will make up the difference if you are borrowing money to buy the house. We know that 1031 exchanges have strict time limits, and we work quickly to help investors close on new properties within the 180-day window.
You have to tell the IRS about the exchange by filing Form 8824 Like-Kind Exchanges with your tax return after the tax year in which it happens. This form lists the properties that are part of the exchange, the dates when they were identified and transferred, and everyone who is involved in the exchange. Your tax advisor should take care of this for you, but make sure they have all the paperwork from your qualified intermediary, such as the exchange agreement, letters of identification, and settlement statements for both transactions.
I've worked with a lot of investors over the years, and I've seen a lot of the same mistakes that can ruin an otherwise successful exchange. Here are some things to stay away from.
This is the number one reason why 1031 exchanges fail. There is no way to change the 45-day deadline. No exceptions or extensions. Your deadline doesn't move to the next business day if day 45 falls on a weekend or holiday. You still have to identify by day 45.
Make sure you have a lot of reminders. Find properties sooner than you think you need to. Get your real estate agent to help you find backup properties, even if they're not perfect. This will keep your options open.
Your ID must be clear and specific. A duplex on Maple Street isn't enough. You need the full street address or legal description. If you don't give clear information, the IRS can turn down your exchange.
Be careful not to point out property that isn't really for sale either. It could be a problem if you find a property that isn't for sale and the owner doesn't want to sell it. The properties you choose should be reasonable targets for acquisition.
You cannot get the money from your sale, even for a short time. I can't stress this enough. Some investors believe that as long as they finish the exchange within 180 days, they can keep the money in a different account or use it for something else for a short time. Not true. Once you get your hands on that money, it becomes taxable income, and your exchange is over. This is why the qualified intermediary is required and not optional.
If you're going to borrow money to buy a new home, start the process early. You don't have time to waste in your 180-day window because mortgage approvals can take 30 to 45 days. Some investors think that getting a loan for the new property will be easy because they were approved for their current mortgage years ago. The markets change. The rules for lending change. It is possible that your finances have changed. Don't wait until the last minute to get financing.
You can put off paying all of your taxes if the property you buy is worth as much or more than the property you give up and you pay off all of your debt. A lot of investors finish the exchange but still owe taxes because they didn't pay off all of their debt or equity.
For instance, You sell a house for $500,000 and have a $200,000 mortgage on it. After you pay off the mortgage, you have $300,000 in equity. If you want to put off paying all of your taxes, the property you buy must be worth at least $500,000, and you must have a mortgage of at least $200,000 or add $200,000 of your own money. You have less debt now that you bought a $500,000 house with cash. That's boot, and you have to pay taxes on it.
Investors may make bad decisions because of the 45-day deadline for identification and the 180-day deadline for closing. You might find a property that looks good at first, but when you do your due diligence, you find out that it has big problems. Or maybe the market has changed, making the properties you found less appealing.
The truth is that it's better to pay the capital gains tax than to be stuck with a bad investment for years. Don't let the tail lead the dog. The 1031 exchange is not a reason to make bad investment decisions; it is a tool to help you make good ones.
Closing costs on both transactions and fees for qualified intermediaries will lower the amount of money you have to exchange. Make sure that the price of the property you want to buy includes these costs, or you'll end up with boot.
Title insurance, escrow fees, recording fees, and possible transfer taxes are all normal closing costs. Closing costs could be between $10,000 and $15,000 on a $500,000 property. You will also have to pay your qualified intermediary $1,000 to $2,500. Include these costs in your calculations.
In 2025's changing market, a number of specialized strategies have become more popular than just property-to-property exchanges.
A Delaware Statutory Trust is a great option if you can't find a good replacement property or if you want to make your management duties a lot easier. Without having to manage the property, DSTs let you buy fractional shares in high-quality institutional real estate that is usually worth between $10 million and $100 million or more.
Windhambrannon's 2025 exchange trend analysis says that DSTs have a number of benefits. They have low minimum investments, and some DSTs will accept investors starting at $100,000. This makes them easy to get into if you're selling a smaller property. They give you passive income because a professional manager takes care of all the tenant relationships, maintenance, and operations. They give you more options because you can spread your exchange funds across several DSTs in different markets and types of property. They include benefits for estate planning because DSTs often give your heirs choices.
What are the trade-offs? You can't make decisions about management, and DST sponsors charge fees that can lower your returns. DSTs have become more popular with investors who want to cut down on active management while still getting a tax break. The 2025 trends report from IPX1031 says that there has been a big move toward passive investments, such as DSTs and triple-net lease properties.
Combining the Section 121 primary residence capital gains exclusion with a 1031 exchange is a smart way to handle property that has been both your home and an investment.
If you've lived in your main home for two of the last five years, Section 121 lets you leave out up to $250,000 for single filers or $500,000 for married couples who file jointly. You can use a 1031 exchange to put off paying taxes on the extra money if your gain is more than those amounts.
Take a look at this example. Twenty years ago, you bought a house for $300,000. You lived in it for 15 years and then rented it out for the last five years. You made $700,000 because it is now worth $1 million. If you and your spouse file taxes together, you can use Section 121 to keep $500,000 of that gain tax-free. You can put off the other $200,000 gain by doing a 1031 exchange into another investment property.
It's hard to figure out how to combine these rules, so you should talk to a real estate tax advisor. But if done right, this plan can save a lot of money on taxes.
Some investors call moving money from expensive low-yield markets to more affordable areas with higher cash flow "geographic arbitrage." This is one of the most powerful ways to use a 1031 exchange.
Think about this situation. In a market with high prices, a $500,000 property might make $20,000 in net operating income each year, which is a 4% cap rate. If you put that same $500,000 into a growing secondary market, you could make $40,000 a year at an 8% cap rate. This would double your cash flow without having to pay taxes when you sell.
IPX1031's market analysis for 2025 shows that investors are actively following this strategy, moving from coastal markets that are already full to Sunbelt regions with better demographics, lower taxes, and more potential for cash flow. Investors looking for better returns have been doing a lot of 1031 exchanges in cities in Texas, Florida, Tennessee, Arizona, and North Carolina.
Some real estate investors probably worry about this: will 1031 exchanges still be available? It's a valid worry because this provision has been the subject of several legislative proposals over the years.
The good news is that 1031 CORP's analysis shows that Section 1031 will still be in place in 2025. The One Big Beautiful Bill Act, which was signed into law in early 2025, kept 1031 exchanges without the $500,000 limit that had been suggested in earlier drafts. This gives investors who are making long-term plans real peace of mind.
Why did 1031 exchanges stay around when many thought they would be limited or gone? The economic data is very convincing. According to 1031 CORP's 2025 analysis, 1031 exchanges support about 568,000 jobs each year, add $55 billion to GDP, create $27.5 billion in labor income, and bring in $12 billion in federal, state, and local tax revenue.
These exchanges are good for more than just individual investors. They help the economy, create jobs, and bring communities back to life. When investors can move money into better investments without paying taxes, everyone wins. People hire construction workers, property managers get clients, and properties that are having trouble get fixed up.
That being said, it's a good idea to keep up with possible changes to the law. The political winds change, and future Congresses or administrations may look at these rules again. Get in touch with a tax advisor who keeps up with these changes and can help you change your plan if you need to.
No, Section 1031 only applies to property that is used for business or investment. Your main home doesn't qualify. If you've lived there for two of the past five years, you might be able to use the Section 121 primary residence exclusion to protect up to $250,000 for single filers or $500,000 for married couples filing jointly of capital gains.
You can use a 1031 exchange as many times as you want. You could theoretically keep trading properties forever, putting off taxes for the rest of your life. Ling and Petrova's microeconomic study shows that 80% of investors who use a 1031 exchange only do it once before selling and paying taxes.
This is when 1031 exchanges can be used to plan your estate. Your heirs will get a step-up in basis to the property's fair market value on the day you die. This basically gets rid of the deferred capital gains taxes. If you paid $300,000 for a house that is now worth $1 million when you die, your heirs will get it with a $1 million basis, and all of those deferred capital gains will be gone. It's one of the few ways to avoid paying capital gains taxes for good instead of just putting them off.
Yes, you can sell one property and trade it for two, three, or even more new properties as long as you follow the rules for identifying them and meet the value and equity requirements. This strategy of diversifying can help you spread your risk across different property types or markets.
If you can't finish the exchange within 180 days, it won't work, and you'll have to pay capital gains taxes on the money you made from the sale. This deadline cannot be moved. This is why a lot of investors look for backup properties or think about other options, like Delaware Statutory Trusts, if their main targets don't work out.
Yes, you can do a partial exchange in which you put some of the money from the sale back into property that is similar to the one you sold. You will have to pay capital gains tax on the part you don't reinvest. If you sell a house for $500,000 and only put $400,000 back into a new house, you'll have to pay capital gains tax on the $100,000 you didn't put back into the new house.
Yes, for a full tax deferral. Your new property should be worth the same as or more than the property you gave up, and you should pay off all of your debt or add cash to make up the difference. If you trade down to a less expensive property, the difference is called "boot" and is subject to tax.
Not right away. After the exchange, the property must be kept for a reasonable amount of time for business or investment purposes. The IRS doesn't say how long you should keep the property, but most tax experts say you should keep it as an investment for at least two years before using it for personal reasons. If you change too quickly, the IRS might say that the exchange wasn't real.
If you sell something in installments, you can spread out your capital gains taxes over several years by getting payments over time instead of all at once. When you reinvest in property of the same kind, a 1031 exchange puts off all capital gains taxes. They have different uses and can't be used together in the same transaction.
Yes, but be very careful. The IRS looks very closely at exchanges between related parties. If you trade property with a family member or an entity you control, both parties must keep the property they got for at least two years. If either party sells within two years, both exchanges will be taxed as if they had happened before. If you're thinking about going this route, you should talk to a tax attorney first because these exchanges need to be set up carefully to avoid problems.
You should keep all of your exchange-related documents for at least seven years. This includes all correspondence with your qualified intermediary, identification letters, purchase and sale agreements, settlement statements, and Form 8824 that you filed with your tax return. You will need a lot of paperwork to show that you followed all the rules if the IRS audits your exchange.
No, property in the United States is not the same as property outside of the United States. If you're an international investor or thinking about buying property in another country, talk to a tax professional who knows about international real estate deals.
When you sell an investment property, the IRS usually takes back the depreciation deductions you've claimed over the years and taxes them at a rate of 25%. You can put off paying this depreciation recapture and your capital gains with a 1031 exchange. The loss in value will also apply to your new property. When you sell without doing another exchange, you'll have to pay depreciation recapture taxes.
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