What is a 1031 Tax Exchange?

A 1031 tax exchange makes it possible for investors to sell and buy property of like kind while deferring tax consequences. This transaction is authorized by section 1031 of the IRS code and offers investors a reliable strategy for the protection of their real estate assets. A successful 1031 tax exchange allows the investor to reinvest 100% of the equity from the sale of a property into the purchase of a preferred replacement property without recognizing any gain. This type of property sale and reinvestment can either be done through a simultaneous or delayed 1031 tax exchange. In most cases a 1031 tax exchange is done as three-party delayed exchange also known as a "Starker Exchange" in which an intermediary ensures a reciprocal transfer of the properties and provides a "safe harbor" against the actual receipt of exchange funds.

What are the advantages of a 1031 exchange?

1031 tax exchanges provide real estate owners with a range of opportunities to meet personal investment objectives including increased leverage, improved cash flow, diversification, reduction of management obligations, geographic relocation and/or consolidation. The tax dollars saved by an exchange may be maximized to increase an investor's overall net worth. Ultimately, the exchange process allows investors to reorganize and improve their real estate portfolios to best suit their unique interests and needs.