Like Kind Exchanges

Sandra heard that she can use a 1031 tax deferred exchange to avoid paying capital gains taxes when she sells her investment property. She owns a mixed use property with small retail spaces on the first floor and three apartments on the second floor.

Hi Sandra,
Unfortunately you can’t avoid paying the IRS the capital gains taxes. At some point, you will have to pay Uncle Sam. However, if you use a 1031 “like kind” exchange, you can replace your present property with another property and defer the payment of the capital gains tax until some time in the future. The key is that you have to replace your existing property with another property.

Basically you would sell your real estate investment and replace it with a “like kind” property. In your case, real estate for real estate. You can’t sell your real estate investment and buy stocks with a “like kind exchange”. Normally if you were selling your property and not completing a 1031 tax deferred exchange, you would have your accountant calculate the capital gains taxes and you would pay the IRS the taxes due in the year that you sold the property. However, if you found a replacement property and followed the strict rules of completing a 1031 exchange, you could defer paying the taxes until you sold the new property. If you wanted, assuming that the IRS doesn’t change the law in the future, you might use a 1031 exchange again when you sell the second property and defer the taxes again. Not a bad deal!

If you intend to complete a 1031 “Like Kind” exchange, it is best to speak with your accountant first before you put your property on the market.