Understanding the 1031 Exchange For Residential Real Estate

How to avoid capital gains tax when investing in another property.

So you’re taking the step forward into investing. You have one property you’d like to sell so that you can purchase another, maybe larger, property Montemayor and Associateswith the proceeds. Under normal conditions:

  • You would sell your home, and receive a check at the close of escrow, minus closing costs and realtor fees.

  • You would be taxed on the capital gains from the sale of your home, thus reducing the amount you can re-invest toward another home.

  • Since you have less to re-invest, you also may not qualify for the size of home you actually want so that you can increase your portfolio and overall net worth.


So what do you do?

You can use IRC Section 1031, more commonly known as a 1031 Exchange, to sell your investment property in order to purchase another WITHOUT being taxed for capital gains. To wit:

"No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment."

Do I have to find another property right away?

According to regulations set forth by Section 1031, the exchange period begins the date the deed of the sale of your first property records. You have 45 days to identify a new “like kind” property, and 180 days to complete the transaction.

Is the 1031 Exchange only limited to residential property, or can I do an exchange for land or commercial property?

The 1031 Exchange covers undeveloped land and commercial properties as well.

What can I do if I want to perform a 1031 Exchange?

You can contact us so that we can make a preliminary determination as to the best way to approach your real estate goals with regard to improving your property investment portfolio. It is also well advised to speak with a tax professional to insure you are aware of all the options and tax benefits and obligations that may arise prior to making your final decision to enter into a 1031 Exchange.

Either way, we’re here to answer all of your questions, and to help facilitate your exchange once you’re ready. Contact Montemayor and Associates for a no obligation consultation.