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1031 Exchange

The IRS 1031 exchange is a transaction that allows a commercial property seller to defer paying taxes on the sale of the property if they use the funds to buy another, similar property within a specific period of time.

If an investor or developer sells a commercial property, they usually have to pay taxes then and there, but not always. If the proceeds are used to purchase another investment property within 180 days (in most cases) they can be tax deferred. This makes it possible for someone to sell one property, use the money from the sale to purchase another similar property and avoid paying taxes until they sell that second investment property.

The reason behind this rule is simple: Congress wanted to encourage entrepreneurs to invest in real estate rather than simply cash out and use their money elsewhere. It's designed to help businesses grow without penalizing them for doing so by taking away needed capital at tax time.

Buying a House

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Step 1

Individuals, S corporations, C corporations, trusts, LLCs, and other groups are eligible to request a 1031 exchange for the purpose of deferring their tax burden until later. However, it's important to realize that 1031 exchanges are designed for the exchange of commercial property. As a result, personal homes and vacation residences may not be eligible. In addition, the seller cannot simply use money from the sale of the first commercial property to purchase the second commercial property; the two deals must be part of the same legal transaction (at least in the perspective of the IRS.)

Who Can Use a 1031 Exchange?



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