By Alex Madden, Vice President, Kay Properties & Investments
Facts About 1031 Exchanges
If you are an investor and you sell a property whose value has increased, you will have to pay certain types of taxes. For instance, you will have to pay federal and state capital gain taxes. If the original seller of the property had claimed depreciation expenses, you will be required to pay depreciation recapture taxes. You can defer these taxes if you do a 1031 exchange. Below are more details on 1031 exchanges.
How to Do a 1031 Exchange?
A 1031 exchange got its name from the code section 1031 of the IRS. It involves swapping properties held for investment or business purposes. The properties being swapped should be of the same class, nature, or character.
When Not to Do a 1031 Exchange
Although doing a 1031 exchange may offer you many benefits, it is always not the best thing to do. For instance, you should not do it if:
- Your tax liability is a bit tolerable
- You are unable to find a suitable property that will replace your property
- You are not eligible for a 1031 exchange
When Should You Do a 1031 Exchange
You should do a 1031 exchange if you can afford and are willing to keep your capital illiquid. In simple words, you should do a 1031 exchange if you are not planning to transition your capital to another investment vehicle. For instance, you can do this exchange if you own a building and want to buy more buildings. However, before you do a 1031 exchange, you should first understand your investment goals.