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1031 Tax Deferred Exchange

Information on 1031 Tax Deferred Exchanges

A 1031 Tax Deferred Exchange is one of the last tax shelters allowed by the Internal Revenue Service. It is a transaction in which a taxpayer exchanges investment property for like-kind property and defers the payment of capital gain taxes. The IRS defines like-kind property as all real property held for the productive use of trade or business or for investment purposes. This basically means any real estate held for investment except your primary residence and second family home.

There are some important rules which must be followed to effectuate a valid exchange:

The exchange must be opened before the close of escrow on the relinquished (sale) property.

  • The taxpayer must identify the replacement (acquired) property within 45 days after the close of the relinquished (sale) property.

  • The taxpayer must close the replacement property within 180 days from the close of the relinquished property or the tax return filing of the relinquished property, whichever comes first.

  • The taxpayer must reinvest all net proceeds into the replacement property.

  • The taxpayer must obtain a debt of equal or greater amount on the replacement property.

By following these rules, the taxpayer may shelter the capital gain taxes into the replacement property. This creates more buying power for the taxpayer than if the capital gain taxes were paid. Also, by deferring the payment of capital gain taxes, the taxpayer gets to invest the taxes interest free from the IRS.

Is this a way to increase your Portfolio of Real Estate without digging into your pocket?

Consider this:

Whether an investor owns a property all cash or with leverage, the benefits of tax deferral are significant. The tax dollar saved can be utilized to purchase additional property. The example below shows the significant advantage of exchanging for an investor who sells a $425,000 property that has been fully depreciated and that was debt-free. This assumes the client is subject to a combined federal and state tax bracket of 35%.

The investor who executed a property 1031 Tax Deferred Exchange defers the payment of capital gain taxes.


Regular Sale:

Net Equity (Minus Cost): $400,000

Taxes Due after Sale (35%): $150,000

Funds to Reinvest into another property: $250,000

1031 Exchange Sale:

Net Equity (Minus Cost): $400,000

Taxes Due after Sale (None): $0

Funds to Reinvest into another property: $400,000

If the investor leverages his new property to 70% by putting 30% down, he could purchase properties totaling:

Acquisition Value doing a Regular Sale: $833,000

Acquisition Value doing a 1031 Exchange Sale: $1,300,000

By doing a 1031 Tax Deferred Exchange, the investor increased his portfolio by $467,000!!!

Click here to view 1031 Exchange Myths

Click here to view 1031 Exchange Rules Sellers Must Follow

Click here to view Understanding The "Tax Free" Exchange

For additional information on 1031 Exchanges, please feel free to contact:

Phil Atwan

Exchange Resources, Inc.

8885 Rio San Diego Drive, #135, San Diego, CA 92108

Phone: 877-799-1031

Direct Line: 213-479-8800



The information provided is not intended as legal or tax advice and may not be relied on for purposes of avoiding federal tax penalties. All individuals, including those involved in a real estate transaction, are advised to meet with their tax and legal professionals.

Charlie Dunn

Make Yours a "DunnDeal"

Licensed Real Estate Broker DRE# 00952327

Direct Line: 562-430-4007

Email: Charlie Dunn