What is a 1031 exchange?
A 1031 exchange is a like-kind exchange of investment real estate where one or more investment properties are exchanged for one or more properties of greater value. The term “1031” comes from the section of the United States Internal Revenue Code which outlines the tax rule.
Why are 1031 exchanges favorable?
Because the taxpayers involved are able to defer their recognition of capital gains and the subsequent tax liability. In other words, one can change the form of their investment without having to “cash out” and pay taxes by rolling their current property into a new one. When you decide to sell, you’ll hopefully pay a one-time tax on the long-term capital gains rate which is currently at 15%.