How 1031 Tax Exchanges Work

Today I want to talk about a pretty important topic: 1031 tax exchanges. If you’re looking to buy or sell investment properties, you want to know about these, so let’s get started. 

When you’re selling a property and your profits exceed $250,000, you usually have to pay capital gains taxes. So if you bought a home for $500,000 and sold it for $750,000, you’ll have to pay the taxes. 

How can you legally avoid capital gains taxes? The first and easiest way is to make less than $250,000 profit if you’re single and less than $500,000 profit if you’re married. In this case, the taxes don’t apply to you in the first place. 

“1031 exchanges are a great tool for anyone looking to buy or sell investment properties.”

However, if your profits are too large to avoid the tax, you can use a 1031 exchange. When you sell a property, you can buy another one equal to or greater than the one you sold. Then, you can defer all the capital gains taxes from the first sale into your next home. So if you sold a home for $750,000, you can buy another one for $750,000 and defer all your taxes. 

To make this work, you have to close on the new property within 180 days of selling your old one. You also have 45 days to identify three similar properties you are considering purchasing. If you meet these requirements, you can completely defer capital gains taxes. 

If you have questions about today’s topic or anything else, please call or email me. I’d love to help you in any way I can!