A 1031 exchange, named after Section 1031 of the Internal Revenue Code, is a powerful tax-deferral strategy that allows real estate investors to defer capital gains taxes on the sale of investment properties. By reinvesting the proceeds from the sale into a new, like-kind property, investors can continue to grow their real estate portfolio without the immediate tax burden that typically accompanies the sale of appreciated assets. Here’s a detailed look at what you can do with a 1031 exchange, along with an example to illustrate the process.

Key Benefits and Uses of a 1031 Exchange:

• Tax Deferral: The primary benefit of a 1031 exchange is the deferral of capital gains taxes. By exchanging one investment property for another, you can defer paying taxes on the gain until you eventually sell the replacement property without engaging in another 1031 exchange.
• Portfolio Diversification: A 1031 exchange allows you to diversify your real estate holdings. For example, you can exchange a single‐family rental property for a multi-family apartment building, commercial property, or even raw land, as long as the properties are considered like-kind.
• Increased Cash Flow: By exchanging into a property with higher rental income potential, you can increase your cash flow. This is particularly beneficial if you’re moving from a property with lower returns to one with a more lucrative income stream.
• Consolidation or Expansion: You can use a 1031 exchange to consolidate multiple properties into one larger property or, conversely, to break up a single property into multiple smaller properties. This flexibility allows you to tailor your investment strategy to your current financial goals.
• Estate Planning: A 1031 exchange can be a useful tool in estate planning. By deferring taxes, you can potentially pass on a larger estate to your heirs. Additionally, if the property is held until death, the heirs may benefit from a step-up in basis, potentially eliminating the deferred gain.

Example of a 1031 Exchange:

Let’s say you own a rental property in San Francisco that you purchased for $300,000 several years ago. The property has appreciated significantly and is now worth $800,000. You decide to sell this property and use the proceeds to purchase a larger apartment complex in Austin, Texas, valued at $1,200,000.

1. Sale of the Relinquished Property: You sell your San Francisco property for $800,000. Instead of receiving the proceeds directly, you engage Deferred.com to act as your qualified intermediary. We hold the funds from the sale to ensure you do not have constructive receipt, which is crucial for maintaining the tax-deferred status of the exchange.
2. Identification of Replacement Property: Within 45 days of the sale, you identify the Austin apartment complex as your replacement property. This identification must be in writing and submitted to Deferred.com.
3. Acquisition of Replacement Property: Within 180 days of the sale of your San Francisco property, you close on the purchase of the Austin apartment complex. Deferred.com uses the $800,000 from the sale of your relinquished property as part of the purchase price, and you secure additional financing or use other funds to cover the remaining $400,000.

By completing this exchange, you defer the capital gains tax on the $500,000 gain from the sale of your San Francisco property. This allows you to reinvest the full amount into a more valuable asset, potentially increasing your cash flow and overall investment portfolio value.

At Deferred.com, we offer a “No Fee Exchange,” which means you can save money on the transaction while benefiting from our expertise in facilitating 1031 exchanges. Our role as a qualified intermediary is to ensure that the exchange is executed smoothly and in compliance with IRS regulations, allowing you to focus on your investment strategy without worrying about the complexities of the tax code.