Although the 1031 tax deferred exchange doesn’t apply for a majority of Americans, it is something that can save you a lot of money if you ever get into the situation. A 1031 tax deferred exchange allows you to take the proceeds from the sale of an investment property and roll it into another similar investment property. As long as you use the proceeds toward a similar investment property, any capital gains will be delayed until later.
Instead of paying the government capital gains tax on your investment property sale, the saved capital gains tax can act like an interest-free cash investment into another property that hopefully will be a more lucrative investment for you. Since a larger sum of money is being put into another investment property (or two), you can invest in a more lucrative piece of investment property that should ideally appreciate at a higher rate.
Be aware that this type of exchange cannot be used for the sale of or purchase of a property for personal residence. Also if you want to make an exchange from one property to two or vice versa, that is also viable.
- 45 days from the sale of your investment property to choose up to three possible replacements investment properties
- 180 days from the sale of your investment property to close the sale of one of the replacements you listed within the first 45 days