Performing 1031 Tax-Deferred Exchanges

In order for a real estate investor, or anyone else who is interested in performing a 1031 Tax-Deferred Exchange to do so, there is a specific legal process that needs to be followed. However the "hoops" that the IRS will require one to "jump" through, does not amount to as complicated a task as some would think. Once the required research has been completed, the process should go quite smoothly.

If you are selling, or thinking about selling a piece of real estate, such as a business property, or a rental, a tax deferred exchange will allow you to purchase a new property with every penny of what you've made through the sale of the previous property. If you do this, you will be under no immediate obligation to pay the government taxes on the property that you have sold. It is when you sell the new property bought, that you will owe taxes on it, unless of course you purchase a third property with the profits. It is only when a piece of real estate is sold or exchanged for a new piece of real estate, that paying taxes can be avoided. The reason for this because when money from a real estate sale is put into more real estate, the government sees this action as a continuation of the original investment.

It is important to note however that one cannot buy and sell properties over and over again to infinity! If you continuously repeat the process of buying and selling, the government will take notice, and require you to pay taxes on property sales. With that said, there is a strategy that can be utilized in order to avoid paying taxes for a while, while reaping large monetary gains, through buying and selling real estate. For example lets say that you find a great deal to purchase a rental home at below market value. What you're going to want to do is rent it for at least a year, sell it at a nice profit, and buy two rental properties with your gains, avoiding taxes altogether! Perhaps repeat this process one more time, winding up with four rental properties earning you a nice monthly income.