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Real estate investors can use a 1031 exchange to trade one property for a similar type of property without paying capital gains taxes. Taxes are deferred until a sale is made without reinvesting in another property.
Tax Code
The term 1031 exchange refers to Section 1031 of the U.S. tax code that governs the provisions of this type of transaction.
Definition
A 1031 exchange is a tax-deferred transaction allowing one investment property to be traded for another investment property. Taxes are not charged on the sale of a property when the proceeds are used to purchase another similar property.
Business Only
A 1031 exchange applies only to investment property--personal property is not eligible to be exchanged.
Form 8824
An IRS tax form 8824 must be filed to claim a 1031 exchange.
Limits
The amount of capital gain that can be differed has limits. Check current tax law or consult a qualified professional before beginning an exchange transaction. The new property must be purchased within 180 days of the sale of the first property.
Related Terms
The real estate terms "like-kind exchange," "reverse-exchange" and "like-kind property transfer" are all related to and make use of the Section 1031 tax provisions. Investopedia.com provides detailed descriptions of each of these terms.
Source:
IRS.gov: Like-Kind Exchanges Under IRC Code Section 1031
Resource:
Investopedia.com: Section 1031
IRS Form 8824
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