This article originally ran on UrbanTurf in 2017.
Today, UrbanTurf will explain how a 1031 exchange works and how property owners can use it.
A 1031 exchange, so-named after its corresponding section of the IRS code, enables people who own investment properties to avoid tax liability upon trading up to a property of equal or greater value and equity.
Also known as a Starker Exchange, the tool allows the owner to defer paying a capital gains tax on a “like-kind property”, meaning that the property must be of the same category. For example, a multi-family building can be sold to purchase another multi-family building — or even several houses.
While the ideal 1031 exchange would involve two parties swapping properties, this is rare in practice. More commonly, exchanges are delayed, where the property owner works with a qualified intermediary to sell their property and purchase another within 180 days.
The 1031 exchange also enables the owner to leverage the value and equity of a property. Without using a 1031, any sale of an investment property will incur a capital gains tax regardless of whether a profit was made.If the newly-purchased property is of lesser value or cost than the one that is sold, the owner will have to pay capital gains tax on the “boot”, or the difference in value between the two.
There are two other types of exchanges in addition to swaps and delayed exchanges: reverse and improvement. Reverse exchanges involve an all-cash purchase of a property under an incorporated name prior to sale of the first property. Improvement exchanges occur when the newly-purchased property costs less than the sold one and the difference is used to build on or improve the former.
The provision does not apply to primary residences, nor most vacation homes or flips. All exchanges must also be under the name of the same taxpayer or accounted for on the same tax return.
This article originally published at https://dc.urbanturf.com/articles/blog/first-timer_primer_how_to_use_a_1031_exchange/12692.
Most Popular... This Week • Last 30 Days • Ever
Neighborhood Development Company has filed plans with DC's Historic Preservation Offi... read »
Plans for the New York-based eatery appear to be moving forward.... read »
The development for four parcels at The Yards from Brookfield Properties and the Menk... read »
EDENS filed a planned unit development for a two-building residential development tha... read »
One of the more prominent features of the project will be a public plaza that will ru... read »
To help home buyers and sellers both novice and seasoned, UrbanTurf is running a seri... read »
As home buyers get the itch to look for a home and start to venture out to open house... read »
The development will replace the 44,700 square-foot retail structure that was previou... read »
The concept includes 14 lanes for bowling, a 1,200 person concert venue, a craft bar ... read »
The zip codes that are home to Brentwood, Takoma Park and sections of Hyattsville top... read »
With this weekend's DC houseboat tour a day away, UrbanTurf thought it only fitting t... read »
President Obama travels to Denver this morning to sign the stimulus bill that has bee... read »
In this week's installment of Ask An Agent, a reader wonders if there is a rule for h... read »
As The Wharf prepares to begin construction, DC's houseboat community heads to its ne... read »
In this week's installment of Ask An Agent, a reader asks a fairly common question th... read »
DC Real Estate Guides
Short guides to navigating the DC-area real estate market
We've collected all our helpful guides for buying, selling and renting in and around Washington, DC in one place. Visit guides.urbanturf.com or start browsing below!
Intro guides for first-time home buyers
Awesome and unusual real estate from across the DC Metro