The 1031 Tax Deferred Exchange: An Introduction
Perhaps one of the most significant forces acting to minimize profit made in real estate, taxes are the mandatory expenses paid to local, state, and federal governments. Paying them is unavoidable if one is to remain in good legal standing and avoid any sort of penalty from the IRS.
Real estate professionals wanting to save as much money as they can on their taxes may do so by familiarizing themselves with certain tax language and programs designed to make sure adequate funds go back into infrastructure and guarantee “fair play” in economics.
One of these tax programs is the 1031 Exchange (also called a “like-kind exchange” or a “Starker”). Per Investopedia, “capital assets” are “significant pieces of property such as homes, cars, investment properties, stocks, bonds, and even collectibles or art. For businesses, a capital asset is a type of asset with a useful life longer than a year that is not intended for sale in the regular course of the business’s operation.” Investopedia uses the example of a computer being purchased by two different businesses, with one purchasing it simply to sell (making the item “inventory”) whereas the other company bought the item to use in an office (making it a “capital asset”). “Capital gains” are the gains received from the sales of a capital asset, and taxes must be paid on the gains.
But what if one buying and selling properties could defer the taxes owed on the first capital gains acquisition to the next? How could that benefit someone in the world of real estate?
And could such a concept be used to reduce any tax burden for one buying a property?