What is Section 1031?
Broadly stated, a 1031 exchange (also called a like-kind exchange or a Starker) is a swap of one investment property for another.
Although most swaps are taxable as sales, if yours meets the requirements of 1031, you’ll either have no tax or limited tax due at the time of the exchange
(For background reading, see Avoid Capital Gains Tax on Your Home Sale.)
In effect, you can change the form of your investment without (as the IRS sees it) cashing out or recognizing a capital gain. That allows your investment to continue to grow tax-deferred. There’s no limit on how many times or how frequently you can do 1031. You can roll over the gain from one piece of investment real estate to another to another and another. Although you may have a profit on each swap, you avoid tax until you sell for cash many years later. Then you’ll hopefully pay only one tax, and that at a long-term capital gain rate (currently 15% or 20%, depending on income—and 0% for some lower income taxpayers).
The provision is only for investment and business property, so you can’t swap your primary residence for another home. There are ways you can use 1031 for swapping vacation homes—more on that later—but this loophole is much narrower than it used to be.
Special Rules for Depreciable Property
Changes to the 1031 Rule
“Like-Kind” is Broad-Based
You Can Do a ‘Delayed’ Exchange
1031 Timeframe Regulations
Tax Implication and Mortgages
1031 Timeframe Regulations
2004 Tightening of the Vacation Home Loophole
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$500,000 capital-gain exclusion.
Moving Into a 1031 Swap Residence
- You must rent the dwelling unit to another person for a fair rental for 14 days or more
- Your own personal use of the dwelling unit cannot exceed the greater of 14 days or 10% of the number of days during the 12-month period that the dwelling unit is rented at a fair rental.