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How investors and entrepreneurs defer capital gains and build wealth.

1031 Exchanges, otherwise known as like-kind exchanges or a “Starker,” gains its name from Section 1031 of the Internal Revenue Code. These exchanges are a “swap” of one investment property for another, which allows capital gains taxes to be deferred. Investors can change the form of their investment without recognizing a capital gain. This allows your investment to continue to grow tax-deferred. You can continually roll over the gains from one investment to another and you essentially avoid paying a tax on that property until it is sold, which can be many years later. Most swaps are taxable as sales, although if yours meets the requirements of 1031, then you’ll either have no tax or limited tax due at the time of the exchange.

The most important factor when pursuing a 1031 exchange is that the properties must be considered “like-kind” properties. This doesn’t mean they have to be the exact same type of property (building for a building or land for land, etc.), just that they’re of the same nature or character, even if they differ in grade or quality. Real properties are typically like-kind, regardless of whether they’re improved or unimproved. Exchangers have the flexibility to change investment strategies to fulfill their needs, from land to buildings, to condominiums or even shopping centers. You just can’t choose your personal residence, as this wouldn’t be an investment property or a property located outside of the United States. You can continually swap as many properties as desired. As long as the swaps are made correctly, there is no limit on how frequently they can be done.

Exchangers should be aware of confusing an exchange for what’s considered a “stock in trade.” Just as an example, houses built by a developer and offered for sale are considered stock in trade. If an investor buys “fixer-uppers” and sells them as soon as they are improved, the properties may be considered as stock in trade and cannot be exchanged. If an investor attempts to exchange too quickly after a property is acquired or trades many properties during a year, the investor may be considered a “dealer” and the properties may be considered stock in trade. Persons dealing with stock in trade are called dealers and are not allowed to exchange their real estate unless they can prove that it was acquired and held strictly for investment.

While the 1031 concept is fairly simple, there are certain forms to be completed and time requirements to meet. Contact the Gibson Law Group, P.C. if you are interested in pursuing a 1031 exchange, we are available and ready to assist!