The Truth About Taxes and 1031 Exchanges

One of the biggest misconceptions surrounding #1031 exchanges has to do with tax liabilities. Many inexperienced investors often refer to an exchange as “tax-free.” And, while that would be great if true, it is not – with one exception.

When it comes to taxes and a 1031 exchange, the most important thing to understand is that an exchange is a deferral strategy not a tax avoidance strategy. You can use a 1031 exchange to trade business or investment property for other “like kind” property. When you do, you can avoid any immediate capital gains tax liability, so long as you meet the strict IRS rules governing section 1031 transactions.

However, eventually some tax will be due. When you go to sell your business or investment property outright, rather than trading it for another like-kind property, the taxman will be knocking at your door. With one exception.

If you hold investment property until your death, any unrecognized gain usually escapes the grasp of the IRS forever. This happens because your heir will receive a step-up in basis to the fair market value of the property, calculated as of the date of death.

Of course, dying is a pretty extreme way to get out of capital gains taxes altogether. But if total tax avoidance with 1031 exchanges is your goal, that’s the only way to do it.

To learn more about 1031 exchanges or our qualified intermediary and replacement property locator services, please visit our website.