You should know about the 1031 tax-deferred exchange if you own an investment property and are considering selling it and buying another one. The procedure permits the owner of investment property to sell and purchase like-kind property while deferring capital gains taxes. Below are some of the most important concepts, rules, and definitions you should know if you consider a 1031 exchange.

As a result of Section 1031 of the U.S. Internal Revenue Code, a 1031 exchange allows you to avoid capital gains taxes if you sell an investment property within certain time limits and reinvest the proceeds in a property or properties of the same kind and of similar value within certain time limits.

You must exchange property of equal or more excellent value for receiving the full benefits of a 1031 exchange. Within 45 days of selling assets, you must identify a replacement property, and within 180 days, you must complete the exchange. To define identification, we can apply three rules. The following criteria must be met to qualify:

• It is possible to identify three properties as potential purchases using the three-property rule, regardless of their market value. As long as the cumulative value of the replacement properties does not exceed 200% of the original property’s sale price, you can identify an unlimited number of replacement properties.
• Using the 95% rule, you can identify as many properties as you want as long as they are worth at least 95% of their total value.

Deferred capital gains taxes can also be avoided using 1031 exchanges by passing the property down to your heirs.

It is worthwhile to consider a 1031 exchange if you plan to sell an investment property or accumulate properties throughout your lifetime. It is essential to work with qualified professionals if you decide a 1031 exchange is the right choice for you.