What Is a 1031 Exchange?
A 1031 exchange basically allows a property investor to swap one property for another. The idea is that, when you sell a property, you roll over any gains from that property into the purchase of a new property.
Since you are using any gains to purchase the new property, you are not realizing the gains, so you do not have to immediately pay any taxes on this money. You defer paying taxes until you sell the new property, unless you do another 1031 exchange.
Qualifying for a 1031 Exchange
To qualify for a 1031 exchange,three criteria must be met:
- The investment property that you purchase must be of equal or greater value than your current property.
- You must use any gains from the previous property sale to purchase the new property.
- The new property must be considered a “like-kind” investment.
What Is Like-Kind Property?
Like-kind simply means replacing one type of investment with a similar type of investment. It does not have to be the exact same type of property, it just has to be an investment property. For example, if you sell a multi-family property, you can buy any other type of real estate that is considered an investment, such as another multi-family, a retail property, a condo or a plot of land.