How often can you 1031 exchange?

Question

How frequently can a taxpayer engage in a 1031 exchange to defer capital gains taxes on the sale of investment or business-use properties, and are there any limitations or considerations that should be taken into account when planning multiple exchanges over time?

ARTE's Answer

The beauty of a 1031 exchange is that there is no limit to how often you can utilize this tax-deferral strategy. As long as you adhere to the rules and regulations set forth by the IRS, you can continue to defer capital gains taxes on the sale of investment properties indefinitely. This makes the 1031 exchange a powerful tool for real estate investors looking to build wealth over time by reinvesting their gains into new properties.

To illustrate how this works, let's consider an example. Suppose you own an investment property that you purchased for $300,000. Over the years, the property has appreciated, and you now have the opportunity to sell it for $500,000. If you were to sell the property outright, you would be subject to capital gains taxes on the $200,000 gain. However, by using a 1031 exchange, you can defer these taxes by reinvesting the proceeds into a new, like-kind property.

Let's say you decide to sell your current property and purchase a new property for $600,000. You engage Deferred.com as your qualified intermediary to facilitate the exchange. We handle the sale of your relinquished property and hold the proceeds until you identify and close on your replacement property. By doing so, you defer the capital gains taxes on your $200,000 gain.

Now, imagine that a few years later, your new property has appreciated in value, and you have the opportunity to sell it for $800,000. Once again, you can use a 1031 exchange to defer the capital gains taxes by reinvesting the proceeds into another like-kind property. You could continue this process indefinitely, deferring taxes each time you exchange properties, as long as you follow the IRS guidelines.

The key to successfully executing multiple 1031 exchanges is to ensure that each transaction meets the IRS requirements. This includes identifying your replacement property within 45 days of selling your relinquished property and closing on the new property within 180 days. Additionally, the properties involved must be held for investment or business purposes, and you must use a qualified intermediary, like Deferred.com, to facilitate the exchange.

By leveraging the 1031 exchange repeatedly, you can continue to grow your real estate portfolio while deferring capital gains taxes, allowing you to reinvest more of your equity into new properties. This strategy can significantly enhance your wealth-building potential over time, making it a popular choice among savvy real estate investors.

Have more questions? Call us at 866-442-1031 or send an email to support@deferred.com to talk with an exchange officer at Deferred.

Deferred's AI Real Estate Tax Expert (ARTE) is a free research tool. Trained on 8,000+ pages of US tax law, regulations and rulings, ARTE outperforms human test takers on the CPA exam. This is page has ARTE's response to a common 1031 Exchange question and should not be considered personalized tax advice.

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