Compare selling outright vs. a 1031 tax-deferred exchange. See exactly how much you save in taxes and how much more you can reinvest.
Sell outright vs. tax-deferred exchange
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Section 1031 of the IRS code allows you to defer all capital gains and depreciation recapture taxes by reinvesting sale proceeds into a "like-kind" replacement property. The tax is deferred, not eliminated — but many investors do serial 1031s and ultimately pass properties to heirs with a stepped-up basis.
45 days after closing to identify up to 3 replacement properties (or more under special rules). 180 days to close on the replacement property. A Qualified Intermediary (QI) must hold the proceeds — you can never touch the cash. Missing either deadline triggers full taxation.
Any real property held for investment or business can exchange for any other real property. Apartment to office, retail to industrial, land to building — all qualify. Personal residences and property held primarily for sale (dealer property) do NOT qualify.
"Boot" is any cash or non-like-kind property received in the exchange. Boot is taxable. If you sell for $2M and only reinvest $1.8M, the $200K boot is taxed. To fully defer, the replacement property must be equal or greater in value, and all equity must be reinvested.
Common questions about 1031 exchanges.
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