Investors can defer taxes by selling an investment property and using the equity to purchase another property in what is known as a 1031 like-kind exchange.
The 1031 exchange, named for Section 1031 of the Internal Revenue Code, allows investors to defer taxes by selling one investment property and using the equity to purchase another property or properties of equal or greater value. This exchange must occur within a specified period of time.
The investor is subject to two deadlines:
- Forty-five days after the sale of the relinquished property they must deliver a written list of the qualified replacement property to a qualified party to the exchange, usually the intermediary (typically you can identify up to 3 properties, but you do not need to purchase all properties you identify)
- Additionally, they must purchase the aggregate value of qualifying replacement assets within 180 days of selling the relinquished asset or 180 days after the due date of their tax return for that year, whichever occurs first.