For investors considering selling real estate investment and deferring tax payments on their capital gains, a 1031 exchange could be an option for reinvestment. Its name is derived from Section 1031 of the Internal Revenue Code, and it provides that no gain or loss shall be recognized on the exchange of real estate, provided that a number of technical requirements are satisfied.

• Commonly referred to as a “like-kind exchange,” a 1031 exchange allows for the complete deferral of all federal and state taxes on relinquished property.
• The seller of a relinquished property must reinvest sale proceeds into a like-kind property.
• An exchange can occur on any type of real estate for any other type of real estate (note: personal property does not qualify)

There are many reasons to choose a 1031 Exchange, including the following:

• Defer federal and state taxes (does not forgive taxes – tax will be paid if later sold in a taxable transaction)
• Build family wealth over time with multiple exchanges
• Exchange non-Income producing property (for example, land) for Income-producing property (for example, multifamily)
• Exchange actively managed property (rental house) for passive property (net lease or DST)
• Acquire higher quality replacement property than a taxpayer can afford on their own
• Diversify to reduce risk by acquiring several replacement properties
• Potential tax forgiveness for heirs with a step-up in basis upon death

Along the way, taxpayers may structure a series of exchanges, in an effort to compound the benefits of tax deferral, thereby potentially building wealth over time.