In order to take advantage of a capital gains tax deferment on sold property, an investor or property owner may want to consider the possibility of completing an IRC 1031 property exchange. This allows them to exchange one property for another of like kind. There are other stipulations as well, such as the amount of time in which the transaction must be completed.
A 1031 like kind exchange is not really an avoidance of tax; it is more of a rollover of equity of like properties so that you can continue to build wealth through investing in real estate. Ever since 1921 there has been an exception in the Capital Gains tax code that states the tax can be deferred if the investment property is not sold but exchanged instead.
The basic idea of the IRC 1031 is for an investor to be able to sell their income or investment property without paying a large sum of capital gains taxes, by exchanging it for a like kind income or investment property. And while the section 1031 exchange rules have actually changed very little since 1921, there are some helpful tips that an investor or property owner should know.
This tax deferred 1031 exchange is much more than just selling an investment property, such as a rental house, and then turning around and buying another rental property. There are some very creative possibilities with this code. Perhaps you should consider purchasing a property in the area where your child is going to attend college, holding it as a rental, and then completing a 1031 exchange after they have graduated. Many investors are leery of selling a property after making a substantial gain in the market, so opting for a 1031 property exchange would allow them to exchange a residential property for office or business rentals.
Usually, an investor will begin to feel like they are ready to cash out, slow down and maybe even retire, so they may start to look around for an area that they would enjoy spending the retirement in. In order to use the IRC 1031 property exchange it does not matter if the property they own is a rental house, warehouses, office building or land, as they can still locate a property in whatever beach resort or mountain community they like and purchase it for the future. Since they must use it as an investment, they simply rent it out for awhile and then later use the conversion option to move into the previously rented property without having any tax obligations due.