Real Estate Word of the Day: 1031 Exchange

Named after Section 1031 of the Internal Revenue Code, a 1031 Exchange allows investors to defer paying capital gains taxes when they sell an investment property and reinvest the proceeds into a new qualifying property. By doing so, investors can leverage their profits to acquire more valuable properties, thus enhancing their investment portfolio without the immediate tax burden.

The primary advantage is the ability to defer capital gains taxes, potentially until the sale of the replacement property. This can lead to significant tax savings, allowing more capital to be reinvested. By reinvesting the entire sale proceeds into new properties, investors can enhance and diversify their portfolios, thus increasing potential returns. Utilizing a 1031 Exchange allows investors to leverage their equity from one property to acquire larger or more profitable properties. When held until death, the heirs can inherit the property with a stepped-up basis, potentially eliminating capital gains taxes altogether.

To take full advantage of a 1031 Exchange, several stringent requirements must be met. The exchanged properties must be of "like-kind," meaning they must be of the same nature, character, or class. In real estate, this generally means any type of real estate held for investment or business purposes. Both the relinquished property (the one being sold) and the replacement property (the one being purchased) must be held for investment or productive use in a trade or business. Investors must identify potential replacement properties within 45 days of selling their original property. The acquisition of the replacement property must be completed within 180 days from the sale of the original property. A qualified intermediary (QI) must facilitate the exchange. The QI holds the proceeds from the sale and uses them to purchase the replacement property, ensuring compliance with IRS regulations.

Looking to buy or sell your home on Staten Island? For all your real estate needs, look no further than Tom Crimmins Realty! Give us a call at (718) 370-3200, and we can provide you with professionally-trained agents who are flexible to all that you’re looking for!

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