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Home For Sellers The 1031 Exchange in Plain English
The 1031 Exchange, a Definition PDF Print E-mail

The Legal Definition of a 1031 Exchange

Section 1031 of the Internal Revenue Code relates to the disposition of property that is held for use in productive trade or business or held for investment. If performed properly, code section 1031 provides an exception to the rule requiring recognition of gain upon the sale or exchange of property. In other words, if the requirements of a valid 1031 exchange are met, capital gain recognition can be deferred until the taxpayer chooses to recognize it. The current Federal tax rate (maximum) on long term capital gains is 28%, plus any applicable state taxes. Long term capital gains are not taxed as ordinary income. For an exchange to be 100% tax deferred, the Exchanger must acquire replacement property that is of equal or greater value and spend all of the net proceeds from the relinquished property. Many specific requirements must be satisfied in order to complete the exchange properly. With the recent IRS Regulations in place, an experienced qualified Broker, Intermediary and Escrow/title Officer, can accomplish an exchange with ease

Now for the Plain English Version:

A 1031 exchange allows you to defer your taxes from the sale of a property as long as you put the money into another property. This means you have more money to use as a down payment to buy an even bigger property, and you can turn that bigger property into more monthly spendable income.

Here is another bonus!

1031 exchanges are more flexible than many people realize. For instance, you can do a "multi-property exchange", where you sell a bunch of small properties and buy a single big one.