A 1031 exchange, also known as a like-kind exchange, is a tax-deferred transaction that allows real estate investors to sell one property and purchase another “like-kind” property without paying capital gains taxes on the sale.
To qualify for a 1031 exchange, both the relinquished property (the property being sold) and the replacement property (the property being purchased) must be held for investment or business purposes. The exchange must also meet several other requirements, such as using a qualified intermediary to facilitate the transaction and identifying the replacement property within 45 days of the sale of the relinquished property.
The benefit of a 1031 exchange is that it allows real estate investors to defer paying capital gains taxes on the sale of their property, allowing them to reinvest their funds into a new property and potentially generate more income and profits. However, it’s important to note that eventually, the investor will have to pay capital gains taxes on the sale of the replacement property, unless they do another 1031 exchange.