What is a 1031 Exchange?

One of the benefits about investing in residential income property over the stock market is section 1031 of the Internal Revenue Code, otherwise known as a 1031 tax deferred exchange.  When you sell a stock investment in order to purchase a different stock investment, for example you sell your old Apple stock in order to purchase some new Facebook stock, you will pay the appropriate capital gains tax on any profit you made from Apple and the remaining proceeds can go towards your Facebook investment.

When investing in real estate, if done according to the 1031 tax code, you may sell one real estate investment in order to purchase a different real estate investment without paying income tax on the profit you made from the sale. The taxes from the sale can be deferred sale after sale, until you do a non 1031 exchange sale, or when the property goes into your estate. You have numerous exchange options. You can sell one property to buy another, sell one to buy several or sell several to buy one. You can mix residential, commercial and land properties. So if you wanted to expand your rental income you could sell your condo to buy a duplex, or sell two duplexes you own to buy an small apartment building.

However, to qualify for  the 1031 tax deferred exchange you must strictly follow the rules which include  very specific buying and selling time periods and how funds must be transferred. You should always consult with your tax consultant regarding the specifics of the tax code and, use a knowledgeable real estate agent to help you navigate through the exchange transaction. More information can be found on my web site at http://tommartinswebsite.com/1031Exchange.