In 2016 there were approximately 5 million home sales. Of those, 40% were investment properties. Approximately 200,000 of those sellers utilized the IRS Rule Section 1031that allows owners of investment property to defer the taxes on the sale of the property by reinvesting in another property within a specified time frame.

Now before you get squirrelly and worry that this is wrong…..read what U.S. Justice Learned Hand had to say on the subject:

“Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes.”

Therefore, it’s a law that each and every property owner should take advantage of so that they protect their investment.

Exactly what is a 1031 Exchange?

Let’s start by talking about what it is not…..

If you sell your primary residence after having lived in it for 2 of the past 5 years, IRS Code Section 121 says that you can exempt up to $250,000 of the profit of the sale ($500,000 if you are married).  Excellent! Take the $250,000 and use it however you chose, but if you made $250,000 on a sale – you should seriously consider reinvesting in another home!

IRS CODE § 1031 DEFINITION

“an exchange which, pursuant to an agreement, the transfers property held for productive use in trade or business or for investment and subsequently receives property to be held either for productive use in trade or business or for investment.”

Therefore, if you own any investment property that you receive a property tax bill for….rental property, commercial property, time share, property used for trade, deeded boat slip, land, farm, etc. you would be required to pay taxes on the profit of that sale, UNLESS, you set up a 1031 exchange. Certain timeframes and criteria must be followed (it’s not difficult) but you would be able to take all of the profit from the property you are selling and use it to purchase another property or even multiple properties – your choice. For example, if you own a home on a family farm you could sell the home as your primary residence and sell the land in a 1031 exchange as long as it was on a separate deed. Nice way to build wealth for yourself and ultimately for your heirs.

Consult with your accountant, lawyer and Realtor ® for advice on your individual situation.