IRS Section 1031 states, "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."
Plainly put, 1031 exchanges allow investors to defer capital gain taxes as well as facilitate significant portfolio growth and increased return on investment. A 1031 exchange allows an investor to sell a property, to reinvest the proceeds in a new property and to defer all capital gain taxes.
What is Like-Kind Property?
What is considered like-kind property? The IRS does not limit this to certain types of real estate. Rather, the term refers to the nature of character of the property, not its grade or quality. Again, any real estate held for productive use in a trade or business or for investment—improved or unimproved—is considered like-kind. Here are several examples:
- Unimproved for improved property
- Single-family rental for a villa or condo
- Vacant land for home
The benefits can be tremendous as this essentially results in a long-term, interest-free loan from the IRS. The real power of tax-deferred exchange is not just the tax savings, it is the increase in purchasing power generated by this tax savings. Other advantages include the preservation of equity, a maximization of ROI and an increased cash flow from larger properties.
Many of my clients over the years have utilized this option (as have I). It is a very smart solution to an age-old problem.
To learn more about 1031 tax deferred exchanges, call me, Bill True, at 843.384.9088 or contact me online to discuss the possibilities!