Today’s question of the day is “What is a 1031 Like-Kind Exchange?”
This is a great starting point for anybody to lay a good foundation in understanding 1031 exchanges and real estate investment in general.
The IRS has allowed people to defer capital gains taxes when they sell a money making property and buy another money making property. Usually you would have to pay these taxes if not for a 1031 exchange. The government has said that if you sell this money making property (we’ll say a rental property) and buy another money making property of like-kind (i.e., a piece of raw land in Hawaii) you can go through a 3rd party and get your taxes deferred. Qualified Intermediaries are the 3rd party that facilitate this tax deferral. This is the plain vanilla way to understand 1031 exchanges and a necessary foundation.This knowledge is useful for everyone becasue somewhere along the lines you’ll realize that buying and selling real estate may fall within your income or retirement plans. You can either pay about 20-25% of the sales price in taxes or not pay them. That is what a 1031 exchange can do for you. It will allow you to defer the taxes forever if you so choose and save you and your heirs $100s of thousands of dollars over time.
So, there’s a little education. Leave me any questions you might have.