Why? Because normally when you sell an investment property for more than what you paid for it, you’d have to pay a hefty capital gains tax. But with a 1031 Exchange, you get to defer paying those taxes if you reinvest the proceeds in a new property, making an “exchange” rather than a sale.
As an investor, you can benefit from deferring the tax liability associated with the sale of real estate through a 1031 exchange. However, there are strict regulations and guidelines to be aware of that dictate what constitutes a valid exchange. Several rules need to be followed while doing a 1031 exchange. Rules related to tax implications and time frames may be problematic. If you’re considering a 1031 exchange, here is what you should know about all the rules.
If you decide to do a 1031 exchange, once the money from the sale of your first property comes through, it will be held in escrow—an independent account monitored by a third party. You won’t be able to access the money until you close on a new property. Note that you’re not allowed to use the money from the 1031 property exchange for anything else.
You can’t sell two commercial 1031 Exchange properties, do two quick fixes and flips and then roll the proceeds into a new apartment building. The money from the first transaction will be held by a qualified intermediary who acquires the replacement property for the taxpayer. And this is fine, provided you follow a few more rules.
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