what is a 1031 exchange in real estate

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Updated Feb 15,2021. In real estate,a 1031 exchange is a swap of one investment property for another that allows capital gains taxes to be deferred. The term,which gets its name from IRS code Section 1031,is bandied about by realtors,title companies,investors,and soccer moms. Some people even insist on making it into a verb,…

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  • What is a 1031 exchange and how does it work?

  • Basically, a 1031 exchange allows you to avoid paying capital gains tax when you sell an investment real estate property if you reinvest your profits into another similar property within a certain period of time. So let say you bought a real estate property five years ago.

  • Can I sell a 1031 exchange property as a principal residence?

  • Now, if you acquire property in a 1031 exchange and later attempt to sell that property as your principal residence, the exclusion will not apply during the five-year period beginning with the date the property was acquired in the 1031 like-kind exchange.

  • How often can you do a 1031 tax swap?

  • There’s no limit on how frequently you can do a 1031. You can roll over the gain from one piece of investment real estate to another and another, and another. Although you may have a profit on each swap, you avoid paying tax until you sell for cash many years later.

  • Can a 1031 be used for a vacation home?

  • The 1031 provision is for investment and business property, although the rules can apply to a former primary residence under certain conditions. There are also ways you can use 1031 for swapping vacation homes攎ore on that later攂ut this loophole is much narrower than it used to be.

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