In real estate, a 1031 exchange is a swap of one investment property for another that allows capital gains taxes to be deferred. The term, which gets its name from the Internal Revenue Service (IRS) code Section 1031, is bandied about by realtors, title companies, investors, and soccer moms.
Is a 1031 exchange considered a cash offer?
Cash can be taken out of a 1031 tax-deferred exchange before, during, and after the exchange. Some investors use their cash boot for personal expenses, while others invest the funds in assets such as precious metals or stocks that aren’t allowed to be used in a 1031 tax-deferred exchange.
Do you have to pay capital gains on 1031 exchange?
It doesn’t eliminate your capital gains tax. Only if you never sell your 1031 exchanged property or keep on doing a 1031 exchange, will you never incur a tax liability. You can pass on your property to your children who get to step-up the value to current market value. This way they never have to pay taxes on your property either.
What does 1031 exchange stand for in real estate?
Updated Mar 12, 2021 In real estate, a 1031 exchange is a swap of one investment property for another that allows capital gains taxes to be deferred. The term, which gets its name from IRS code…
Can a 1031 exchange be used as an UPREIT?
There are no 1031 exchanges out of an UPREIT (or REIT) into physical, or real, property. Your investment must remain in the form of OP units to defer capital gains taxes. Still, when handled correctly, the DST-721/UPREIT exchange can offer a viable alternative to direct property ownership while keeping capital gain taxes at bay.
What happens to depreciable property in a 1031 exchange?
Warning: Special rules apply when depreciable property is exchanged in a 1031. It can trigger a gain known as “depreciation recapture” that is taxed as ordinary income. In general, if you swap one building for another building you can avoid this recapture.
