(A special thanks to Keystone CPA for their help in making sure the information below is as correct as possible!)
Taxes suck, don’t they?
Sure, they pay for our roads, our schools, our bank bailouts, and our welfare system… but they are kind of the pits.
But what if I told you there was a way to make them suck a little less?
Enter: The 1031 Exchange. To a lifelong real estate investor, this little trick might completely revolutionize your business and help you save on taxes AND build significantly more wealth. This post will be your road map to make this happen.
What is a 1031 Exchange?
If you decide to sell a rental property at some point, you will need to pay taxes on that gain.
Bummer.
Now, this might not be a big deal if you are a terrible investor or have had some bad luck and you don’t have any financial gain. But hopefully you are a smart real estate investor. You read BiggerPockets, after all. You aren’t going to make some measly profit or sell at a loss. You are going to rock this game and make some serious moolah when you sell! In short, you are going to have so much cash that you’ll need to get yourself some bigger pockets. (See what I did there!?)
But then Uncle Sam is gonna come a-knockin’ for his piece of the pie. And trust me, he’s got quite an appetite.
Don’t fret, though! I’ve got some good news: The IRS wants to partner with you on that money by allowing you to do a 1031 exchange.
Seriously? Partner? With the IRS?
Yep. Through a 1031 exchange.
A 1031 exchange (pronounced “ten thirty-one exchange” if you are cool like me), is a tax strategy so named because of its inclusion in Section 1031 of the IRS tax code. It also commonly known as a “Starker exchange” or a “Like Kind exchange.” In essence, a 1031 exchange allows an investor to “defer” paying any property taxes on the property when it is sold, as long as another “like-kind” asset is purchased using the profit received. We’ll talk about exactly what that means in just a moment, but let’s cover the big picture first.
(click to continue reading on BiggerPockets)
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