So, you’ve heard the term, and now you’re wondering, what’s a 1031 exchange? This is a great financial strategy to explore if you deal with investment properties.

Between your career, property, and assets, taxes can feel like an inescapable cost – but this is a tax code that carries a wealth of benefits.

What’s a 1031 Exchange?

I’m always delighted to share more about this tax code with my clients! While not commonly known amongst home investors, you certainly need to know what this code is and how it can help you. If you have heard of a like-kind exchange, it’s the same thing – the terms are used interchangeably.

A 1031 exchange is a property investing approach that allows investors to exchange one investment property for another while deferring capital gains or losses. This postponement also applies to the capital gains tax that would otherwise be due at the time of sale.

This strategy is popular among investors who want to improve their homes without paying taxes on the profits.

Essentially, you can “swap” similar properties to limit or eliminate the taxes due at the time of your sale. The primary restriction is that the properties must be similar, meaning your “swap” must be between residential or commercial properties.

You cannot sell a commercial property and apply for the 1031 exchange if you plan on purchasing a residential property.

1031 Tax Exchange Benefits

There are many advantages to using a 1031 exchange in your next investment property transaction. However, as with any real estate business or transaction, it is essential to consider how well this strategy works for you.

The primary benefits of the 1031 exchange include:

Improved Cash Flow

When you buy a property through a 1031 exchange, capital gains taxes are postponed, which means a larger portion of the revenues can go toward your new investment.

Reset Depreciation Timeline

You’ll be able to purchase a new property and use depreciation to offset your income. This can add up quickly if you’ve had a property for a long time.

Expand To New Markets

1031 exchanges are allowed anywhere in the United States, with no limitations based on state borders. As a result, using an exchange is a great way to get your foot in the door of a market with a lot of room for growth.

Adding to the potential of making more money in the future.

Diversify With Higher-Value Properties

A 1031 exchange allows you to move up for a property or many properties that better meet your investment goals and provide higher returns while avoiding paying taxes on the new investment.

what's a 1031 exchange

1031 Tax Exchange Drawbacks

While there are numerous advantages to 1031 exchanges, there are a few drawbacks to be aware of, including:

You Have To Move Fast

There are several different types of 1031 exchanges, but the most popular one gives you 45 days from the sale of your surrendered property to find a new property.  Then, you have 180 days from the date of your surrendered property’s sale to close on the new investment.

It’s Challenging To Find Replacement Properties

Finding a similar house that suits your criteria within the 45-day window can be challenging, so prepare ahead and have a backup plan in place. Without a qualified replacement property, you must pay taxes on all gains.

Taxes On The Boot

You can complete a 1031 exchange for a property worth less than the one you’re selling. Still, you’ll have to pay capital gains taxes and depreciation on the ‘boot.’ Any money remaining from the sale of your surrendered property that did not go toward the replacement property is referred to as the boot.

Using a 1031 Tax Exchange in Nevada

“What’s a 1031 exchange?” is the first question, but your next question likely relates to how you can use this strategy in Nevada – especially if you’re making the move to Northern Nevada.

The best way to learn more about using the 1031 exchange is by finding a qualified intermediary.

Not only does this help you with the process, but it is also required per the terms of this tax code. An intermediary assists with both in-state and out-of-state transactions.

Because this is a federal code, it can be used throughout the US – even if the exchanged properties are in two different states.

Final Thoughts

You don’t have to try and figure out what’s a 1031 exchange on your own. Actually, it is better if you don’t unless you know all the ins and outs of a 1031 exchange.

Working with an experienced and qualified Nevada real estate expert like myself is a great way to ensure everything included in your 1031 exchange is properly sorted.