A 1031 Exchange is a powerful tax-deferment strategy used by some of the most financially successful investors to defer taxes when selling investment/commercial property.  This effective strategy is also known as a “Starker Exchange”, named for the first tax case that allowed the exchange, or a “Like Kind Exchange”, referring to the type of change that occurs.  This tax-efficient way of preserving capital that is invested in real estate is appropriately named a 1031 Exchange, after Section 1031 of the IRS code.

Section 1031 of the Internal Revenue Code provides an exception that allows the deferment of payments of capital gains taxes when a business or investment property is sold, if the reinvestment of the proceeds is reinvested in a similar property through a like-kind exchange.  To put it simply, a 1031 exchange allows an investor to “defer” paying capital gains taxes on an investment property when it is sold, as long another “like-kind property” is purchased with the profit gained by the sale of the first property.  An investor will eventually cash out and pay taxes, but in the meantime, Section 1031 allows an investor to trade properties without incurring a sudden tax obligation. Continue reading →