Learning Time: 1031 Exchange

A 1031 exchange is a real estate investor's golden ticket to avoiding (in reality just deferring) capital gains taxes. What it is, is essentially a swap of one investment property for another of equal or higher value. This is great when a real estate investor plans on continuing to be a real estate investor, but they want to upgrade their property, without paying taxes when selling their original property. There are rules of course. For example, someone doing a 1031 exchange needs to identify the place they plan on buying within 45 days of selling their property, and close on the new property within 180 days. The gains made from selling the original property also has to be held in a third party escrow account. So technically speaking the money made from the sale is not “liquid” and cannot be touched. It can only be used to purchase a new “like-kind” property. Something to note is that the property MUST be in the United States. This process is very common and popular for real estate investors seeking to grow and maximize their portfolios and save money on taxes. 

On a separate note. For people who own real estate and want to sell it, but not do a 1031 exchange. A very important thing to know is the “Capital Gains Exemption”. This lovely tax tool allows people selling their homes (you must have lived in the home for a minimum of 2 of the last 5 years), to not pay taxes on capital gains on the property up to a certain extent. For single people they are exempt from $250,000 and married couples, $500,000. Meaning if you bought the home for $1,000,000 and sold it for $1,250,000, you would pay zero dollars in capital gains taxes. Real estate is the only investment that the U.S. government will allow you to not pay taxes to that amount.