How to Ensure Full Tax Deferral For Your 1031 Exchange

The whole point of a #1031 exchange is to defer tax liability on the transaction in order to free up equity to purchase more valuable property and grow investments. Unfortunately, some investors don’t fully understand the requirements for full tax deferral, and make common mistakes that lead to unintended immediate tax liability on their investment transactions.

To qualify for full tax deferral, an investor must meet two basic requirements in a 1031 exchange:

• Reinvest the entire net equity in one or more replacement properties, and
• Acquire one or more replacement properties with the same or greater amount of debt.

Alternatively, the investor can acquire property of equal or greater value by using all of the net equity in the acquisition. Some debt reduction is permissible if it is offset by a cash contribution at the closing for the replacement property.

If the investor receives any “boot” – this can be cash, debt relief, or other non like-kind property – as the result of the transaction, the value of this “boot” is taxable to the investor.

If you’re considering a 1031 exchange, please visit our website to learn more about the exchange process, our qualified intermediary services and how we can help you find and close on your next 1031 exchange property.