What is a 1031 Tax Deferred Exchange? 

Just like the name implies a 1031 Exchange, sometimes referred to as a “Starker Exchange”, “Tax Free Exchange” or a “Deferred Exchange”, is a like-kind exchange of investment property under section 1031 of the Internal Revenue Code that results in a deferral of capital gains tax liability until your last sale of the investment property. 

In English:  Lets say someone has owned an investment property for a while depreciating it every year resulting in a lower tax basis for the property.  Then the investor sells the property outright.  The sale results in a large capital gain.  To avoid this situation, the investor could have exchanged the property for other real estate and the new property will take the basis of the property the investor exchanged and any gain (other than that considered “boot”) will not be recognized until the new property is sold. 

A 1031 Exchange is not really a “tax free device” but a tax deferral.  There are complex rules so you will want to make sure that you consult with a qualified exchange accommodator, legal counsel or tax professional to handle your exchange properly.  Additionally, a Realtor® who is experienced with the exchange process can be a huge help.  Larry Roorda of Premier Properties of Southwest Florida, Inc. REALTORS has facilitated numerous 1031 exchanges for his clients and himself.

For more information about 1031 Exchanges here are some additional resources:

Internal Revenue Service – Like-Kind Exchanges – Real Estate Tax Tips
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Realty Times – Starker Exchanges Deals without Dollars
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*This article is intended for informational purposes only.