A 1031 Exchange, named after section 1031 of the IRS code, allows you to defer tax liability when selling investment real estate and replace it with other investment real estate.

Taxation on the sale of investment property does not offer the same tax exemptions available when selling your principal residence. By using a 1031 Exchange, you can defer payment of the tax normally due on the sale of your property to avoid paying taxes and increasing profits.

There are many benefits to performing a 1031 exchange instead of a sale and new purchase. You can use the sale proceeds to purchase an existing home, condo or lot on Lake Martin as an investment. If you exchange for a lot you will want to consider an improvement exchange. This will allow you to include the cost of seawall, dock, and home to maximize the amount of deferred taxes.

Qualifying 1031 Exchange Properties

To qualify for a 1031 Exchange, you must trade real estate that is classified as an investment investment property. There are requirements related to the use of the investment property. 1031 Exchanges can not be used in the sale of your primary residence or second home.

1. Rent the qualifying property at fair market value for at least 14 days each year; and
2. Use the qualifying property for personal purposes no more than 14 days each year or 10% of the actual period it is rented out each year.

To qualify, you must use a Qualified Intermediary to complete the 1031 exchange transaction, who in turn buys the next property you have chosen. You are not required to exchange all of your cash from the sale of the first property into the purchase of the second. However, if you take proceeds from the first sale, each dollar taken is subject to capital gains tax. To avoid the tax, you must rollover the entire gain into the new property. You may also exchange one property for several others or vice versa. It does not have to be one for one.