According to Inman News, Section 1031 exchanges "allows the seller of an investment or business property to postpone
recognition of gain provided the seller acquires another, "like-kind"
property within the timing requirements spelled out in the law."
Many real estate investors today, seeing the upcoming changes in taxes in 2013 and seeing the possibilities of facing the "fiscal cliff", are starting to do the calculations and see that this option for investments is worth looking into.
When you sell a property for more money than what you bought it for, the profit you make is known as a capital gain. A capital gain tax is a tax imposed on that profit. What a section 1031 exchange allows you to do is defer that tax and buy a "like property". This means that property investors would be able to put a larger chunk of their profit into investing in a new property. Since they were not taxed, they had more gain from the investment with which to put towards another, larger investment. With tax rates looking more and more like they will be on the rise in 2013, this option is peaking a lot of investors interests.
This deferment does have a downside though. It is a tax deferment system, not a tax forgiveness system, meaning that down the line it will come back around and you will still have to pay the tax you deferred. Also, when you do a 1031 exchange, this moves your tax basis to your replacement property, and subjects you to future tax rates.
More investors today are looking at the section 1031 option more carefully. With taxes seeming to be on the rise relatively soon, a deferment of this tax and a larger investment may be the better choice for many facing down bigger losses from taxes in the upcoming year.
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