The 1031 Exchange has been called one of the most powerful wealth-building tools available to taxpayers. However, it’s also one of the most underutilized sections of the tax code perhaps because of its name. Calling the procedure an exchange creates misunderstanding; so think of it as a 1031 rollover because that’s precisely what happens.
Taking its name from Section 1031 of the Internal Revenue Code, it allows a taxpayer to sell income, investment or business property and replace it with a like-kind property. Capital gains from the sale of property are essentially rolled over to a new property to postpone paying tax. The ultimate goal is to make this tax disappear by one of two ways:
As with anything, there are many rules in place for 1031 Exchanges, meaning they’re not for the do-it-yourself investor. For advice on whether a 1031 Exchange is right for you, consult with your tax professional.