Fidelity
Asset
Exchange
1031 Exchange Explained
Section 1031 of the Internal Revenue Code provides that no gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged for real property of like-kind to be used either for productive use in a trade or business or for investment. Simply put, an investment real property sold will trigger no immediate tax consequences as long as it is exchanged into another like-kind investment real property. Of course, there are guidelines set forth within the tax code that must be strictly adhered to in order for an exchange to be successful.
To illustrate the benefits of a 1031 Exchange in a simplified scenario:
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Andy wants to reposition his investment from California to Nevada, and sells his single-family rental property in California for $900,000 with no mortgage, and ends up with $600,000 in capital gain. Andy does not know about 1031 Exchange, and pays nearly $200,000 in capital gain tax. After tax, his net asset went down to $700,000.
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Bryant on the other hand also sells the single-family rental property for $900,000, and puts the entire proceeds into a 1031 exchange account where the capital gain tax is 100% deferred. He then buys three $1M apartment buildings in Nevada with a $300,000 down payment on each. His net asset did not change at $900,000, and his gross asset went up to $3M.
Such is the value of 1031 Exchange. It ensures continuity of investments and helps investors grow their wealth by leveraging the financing power of deferred taxes. It helps build the American real estate industry and contributes significantly to the growth of the American economy.