This is beneficial for people who want to swap properties with each other rather than selling them, for example. Even if you profit on a swap, you’ll be able to limit your taxes with a 1031, allowing your investment to grow with taxes deferred.
If everything works out the way it should, then you’ll pay capital gains on the investment when you sell it for cash in the future. At that time, the rate will usually be between 15% and 20%, but it may be lower.
What does it mean to exchange “like” properties?
Interestingly, exchanging like properties doesn’t mean you have to exchange two condos or two lots of land of a similar type. Instead, it just means that you need to be exchanging one investment or business property for another. There are specific rules that may apply, though, so it’s a good idea to have a firm understanding of the rules and regulations before trying to use a 1031 exchange.
Can you use a 1031 exchange for your vacation home?
It’s possible, but the rules today are stricter than in the past. Taxpayers are allowed to make their vacation homes into rental properties for the purpose of using a 1031 exchange, but you need to have tenants. If you don’t, then the property will end up being disqualified.
A 1031 exchange could help you save money as you build your investments
As you build your investments, it’s often a good choice to defer taxes. You’ll potentially save money by being taxed only on long-term capital gains rather than short gains, too. This is a somewhat complex rule, so it’s smart to get to know more about it and to make sure it applies to your property before you attempt to swap it with another.