Why We Need the 1031 Exchange

Sell or Trade?

The main benefit of carrying out a 1031 exchange rather than simply selling one property and buying another is the tax deferral. In many real estate markets today, there are investment opportunities that were nearly impossible to find less than one year ago. By conducting a reverse 1031 exchange you can seize the potential opportunities you see before another investor takes them away:

A 1031 exchange allows you to defer capital gains tax, thus freeing more capital for investment in the replacement property. In real estate, a 1031 exchange is a swap of one investment property for another that allows capital gains taxes to be deferred. The term, which gets its name from IRS code Section 1031, is bandied about by realtors, title companies, investors, and soccer moms. The 1031 exchange can be a great tool to increase your cash flow by deferring taxes. Savvy real estate investors have used it for decades.

Through a properly executed 1031 exchange, you can legally defer, almost indefinitely, paying taxes on investment gains. If you are leaving real estate to your heirs, they will not have a taxable event unless the real estate is valued at eleven million dollars (as of 2023). 

Strategy

By identifying the replacement property first and not closing escrow on the sale of your property, you can find more time to choose and negotiate the best deal to match your investment strategy. When listing the relinquished property for sale after negotiating your replacement property, you gain more control over the price, and contract terms and conditions to stay within the 180-day timeline for successfully completing your reverse 1031 tax-deferred exchange.