What is a 1031?

A 1031 exchange, also called a Starker Loophole, is a method by which the IRS allows investors to defer taxes on the profits of properties that they sell. Since deferring taxes is almost always a good idea, let's dig deeper.

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The idea is, you sell property A at a profit. Instead of paying taxes today on your gains, you roll the entire proceeds into another property, deferring the taxes, and getting the benefit of compounding your investment with the full value of your sale (not the 60% +/- you'd have after taxes). 

 

You'll hear that the properties must be "in-kind" to make this work. In real estate, that's generally straight forward: you can swap an apartment building for raw land, for example, as both would be considered "real estate that is held for productive use in a trade or business or for investment purposes."

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Timing is important. The IRS requires that you take no more than 45 days from the day you sell your old property until you can identify, in writing, the new property. And, the full exchange must be completed within 180 days after you sell the old property.

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The Boot

You can add cash or other property to a 1031 exchange, and that is, oddly enough, called "the boot." If you use a boot, you'll have some taxable gains or losses in the year of the exchange. You'll want professional taxation advice on this, however, it is possible and not infrequently used.

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Interested in swapping your 1031 property?

Let us know if you have a specific interest in a 1031 exchange. We can't give tax or legal advice, but we may be able to help you move forward with an exchange into one of our properties. Feel free to email us at InvestorRelations@OptInVentures.com

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