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When it comes to real estate investing, taxes are a seemingly unavoidable part of the deal. A 1031 exchange makes it possible to swap investment properties and defer capital gains tax and losses. Although the proceeds may still be subject to tax, a 1031 exchange allows you to postpone the payment, making it possible to reset depreciation, consolidate properties, and invest in better return prospects.
What is it?
A 1031 exchange is named after section 1031 of the US Internal Revenue Code. Under Section 1031, individuals can defer capital gains tax when selling an investment property.
Will it benefit me?
If you’re selling a property and you can re-invest the profits, then it most likely will create a tax benefit.
What to expect
In essence, a 1031 exchange allows you to sell one property, buy another, and defer capital gains tax. A 1031 exchange makes it possible to diversify your holdings, expand your portfolio, and realign your investments with your long-term goals. A 1031 exchange is also a great way to use depreciation to your financial advantage.
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