A 1031 exchange is an exchange of funds from one property to another. This allows for capital gains tax to be deferred. 1031 exchanges are regulated by the IRS and have several limits such as:

• Type of Property Eligible for an Exchange: Real Estate held for investment in the United States.

• Time Constraints on Completing the Exchange: Forty-five (45) days to select the replacement property and one hundred eighty (180) days to complete the closing on the replacement property.

• Use of a Qualified Intermediary: to hold funds from sale to purchase the replacement property.

• Tax Deferral: The most immediate benefit is the ability to defer paying capital gains taxes on the sale of an investment property, as long as the proceeds are reinvested in a like-kind property.

• Upgrade Your Investments: By deferring taxes, investors have more capital available to invest in another property, potentially leading to higher returns and increased cash flow.

• Portfolio Diversification: Investors can diversify their investment portfolios by exchanging one type of property for another, such as trading an apartment building for a retail space or raw land.

• Continual Growth: There is no limit on how many times an investor can perform a 1031 exchange, allowing for the continual growth of investments on a tax-deferred basis.

• Delayed Exchange [Most Common]: Property is sold and then a replacement property is acquired.

• Simultaneous Exchange: Relinquished and replacement properties are exchanged at the same time.

• Reverse Exchange: Replacement property is purchased before the relinquished property is sold.

• Improvement or Construction Exchange: Investors makes improvements on the replacement property using the exchange funds.

• Like-Kind Property: The properties involved must be of similar nature or character, though not necessarily of the same grade or quality.

• Investment or Business Property Only: The exchange must involve property held for investment or used in a business. Personal residences are excluded.

• Greater or Equal Value: The replacement property should be of equal or greater value to defer all the capital gains taxes.

• Same Taxpayer: The tax return and title for the property must remain in the same taxpayer’s name before and after the exchange.

• No “Boot” Received: “Boot” is any form of non-like-kind property received in the exchange, such as cash or relief from debt. Receiving boot can trigger tax liabilities.

• Reinvest All Equity: All equity from the relinquished property must be reinvested into the replacement property to defer all capital gains taxes.

• Arm’s Length Transactions: The exchange must be between parties who are acting in their own self-interest and are not related, to ensure the transaction is conducted fairly and at market value.