Here are some of the main rules for delayed 1031 exchanges, which are by far the most popular. Now, the original simultaneous exchange still exists, as well as three types of exchanges that happen over the course of 180 days: the delayed exchange, a reverse exchange, and a construction or improvement exchange. However, this expanded over time to allow for greater flexibility. Under the original 1031 exchange rules, exchanges had to happen simultaneously. Myth: A 1031 Exchange Must Be Simultaneous As we’ll cover in the rules section later in this article, almost any kind of investment or business property can be traded for any other kind with a 1031 exchange. Everyday people can and do use 1031 exchanges on a regular basis as a way to grow their wealth, diversify their investments, and move investments around the country. This is simply not true, but the impression exists because only high-profile 1031 exchanges between big corporations or famous individuals tend to make the headlines. Myth: 1031 Exchanges Are Only For The Wealthy You can also use a 1031 exchange to trade one large property for three smaller properties if you want to leave one to each of your three children, or swap for properties that your heirs will be interested in.Īlthough 1031 exchanges have been allowed in the United States since 1921, there are still a lot of myths and misconceptions about them.
While they are technically tax-deferred exchanges, you can acquire a property through a 1031 exchange, leave it in your will to an heir, when you die and the heir takes possession of the property, the value will be stepped up to fair market value and your heir will not have to pay any capital gains taxes on the property.
You can also select property types that allow you to take maximum advantage of depreciation benefits.įinally, 1031 exchanges can be a valuable estate planning tool. Since it’s much easier to acquire a variety of properties using 1031 exchanges, you can diversify your portfolio and decrease risk by investing in a wide variety of property types. In this way, you can increase your income by trading up to a property that produces more income, and you can also alleviate maintenance burdens by swapping a high maintenance property for lower maintenance or managed property. The biggest and most obvious one is that you will not immediately have to pay capital gains taxes on the proceeds of the property that you sold, which means you can leverage more equity to purchase a more valuable replacement property. There are many benefits of 1031 exchanges.
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