Real Estate Investment Software

In any real estate investment transaction, the property owner (seller) is taxed on the gains from the sale. However, through a Section 1031 Exchange, the tax on the gain is deferred.

Section 1031 of the Internal Revenue Code provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business, or for investment. A tax-deferred exchange is a way for a property owner to trade properties for one or more replacement properties of “like-kind”. 1031 exchanges will defer federal and state taxes because it would be unfair to force the taxpayer to pay tax on a “paper” gain.

The like-kind 1031 exchange is tax-deferred, not tax-free. When the exchanged property is finally sold (not as part of another exchange), the original deferred gain, plus any additional gains since the purchase of the exchanged property, will be taxed.