1031 Like-Kind Exchanges

Like kind exchanges, also called 1031 exchanges, are simpler than you might think. The IRS requires you to use a qualified intermediary (QI) to perform the transaction, and most QIs are knowledgeable about the process and can answer any questions you might have. Allow them to handle your paperwork, transfer of funds, title and property, and even locate replacement property for you.

Encouraging Tax Deferral

Believe it or not, the government wants investors to defer their taxes this way. It keeps capital flowing and keeps the real estate market flourishing. When you have more money to spend, you can purchase more income property, create more income, and eventually pay the capital gains taxes anyway.

The term "like kind" does not mean that you have to trade houses for houses or land for land. In fact, as long as the dollars match up, you can exchange any type of investment real estate. For example, you can exchange undeveloped land for a shopping center or an apartment building and a house for office buildings. The only stipulation is that you must be trading in equal or greater value.

There is a strict 180 day deadline during which you can perform the transaction. If you miss the deadline, you will have to pay heavy taxes on the sale of your property. Also, you must not receive any of the proceeds for your sale--they must be transferred through your QI and reinvested into the replacement property.