How to defer capital gains tax on real estate investment property

A 1031 tax deferred exchange allows real estate investors to sell their current investment property, use all of the equity to purchase a replacement investment property, defer the capital gains tax, and leverage all of the equity into the investment property.

Difficulty: Moderately Challenging

Instructions

1. 

   Find a qualified 1031 exchange intermediary to assist with the exchange. There are several companies online.

2. 

   List your current investment property with a real estate agent knowledgeable in exchanges. The purchase and sell agreement must have an "exchange cooperation clause" clearly indicating the seller is performing an exchange.

3. Inform the intermediary of the contract on the relinquished property.

4. 

   Search for and write a contract on an acceptable replacement investment property. The investor has 45 days from when the relinquish property closes to identify in writing potential replacement properties. The list has to be provided to the intermediary.

5. Close on the replacement investment property within 180 days from the closing of the relinquished property.

Tips & Warnings

• To qualify for an exchange, you have to sell property held for investment purposes and acquire property held for investment purposes. Propeties purchased to flip do not qualify.
• All of the equity has to be reinvested into the replacement property.
• The same or greater debt has to be obtained on the replacement property as was on the relinquished property.
• The time frames are critical! They have to be met or the exchange cannot proceed which will trigger the capital gains.