Beginner’s Guide to Understanding Section 1031 Exchange Investments

There’s something that people who are involved in the real state (or interested in it) should know about, and that is the section 1031 exchange investments, and how they work. There’s a lot to understand about the section 1031 exchange before trying it, since making a mistake or misunderstanding something about it might lead to unpleasant results.

First, let’s properly describe what this is all about. We can first begin by saying that this section 1031 exchange is a section of the internal revenue code of the United States, and focuses on how is possible for a taxpayer to defer capital gain taxes during an exchange of property, and this process is referred as a 1031 exchange. 

The process is so well known by the world of real-estate, to the point of people using it as an adverb, and saying things like “Let’s 1031 one of these buildings”, and before, it was recognized by traders all around the world, considering that not long ago, this type of procedure was used in exchanges of many types of goods.

These goods included plenty of different types of property, but now solely focuses on real estate properties, as portrayed in the Tax Cuts and Jobs Act of 2017. 

Before that, you could trade with stocks, precious metals, and other types of goods. Nowadays, only real estate properties are available for it, but there are some rules to follow before are able to defer capital gain taxes. 

Capital gain tax is a type of tax (or fee) imposed by the government during exchanges or trades that are profitable, and it’s usually calculated by considering the initial price of the asset and the actual selling price. In case you want more detailed information about it, you can visit this website here

There are two types of capital gain taxes, short-term taxes that are applied to assets and properties owned for less than a year, and long-term taxes applied for those properties owned for more than a year. Shor-term capital gain taxes tend to be higher in comparison to long-term taxes, and this is done to maintain control of volatility of stocks and property assets.

When 1031 Is Appliable

There are some rules to follow when it comes to these types of exchanges, but the most important one is that the properties that are being exchanged require to be of the same type, no matter if the quality or value of both properties is different in level. 

The properties will also be required to be used or held for productive purposes, business- related goals, or investment.

Real estate properties inside the United States and properties in other countries, although similar are not considered the same, though. One of the rules that have to be followed for two properties to be considered equally (or of the same kind) is that they need to belong to one of the states inside the U.S.

You can get even more specific information about these rules here

In case these rules are not followed, the capital gain tax will be applied. The amount that will be paid will depend heavily on two things: how much time you owned the property, and how much you will be profiting from the sell or exchange. 

These taxes might differ, but can go from 0% to 15 and 20% depending on the type of asset/property, how long you have owned it, and the amount of profit you’ll get from selling it or exchanging it from another profit. As long as your property and the target are selectable for the revenue code section 1031, you might be able to avoid this tax. But remember, from 2018 to this day, only real estate properties are selectable for such benefits.

For other types of assets that can be considered as tradeable/salable goods, like jewelry, the rules are pretty similar, but might diff depending on the good, so I recommend you to do your research beforehand.

As a last advice, If you are interested in the whole 1031 exchange investment, and you are part of the real-state community interested in exchanging properties, you should first 

check it with a legal professional before making any decision.