If you’re a real estate investor and you aren’t taking advantage of the 1031 exchange, you’re missing out on a valuable wealth-building opportunity. It’s widely said that the biggest advantage of the 1031 exchange is being able to defer capital gains tax. And while that is certainly a huge benefit, it’s not the biggest. The biggest benefit is the chance to grow a real estate portfolio worth millions of dollars with a comparatively small initial investment.
What Is the 1031 Exchange?
The 1031 exchange references a section of the Internal Revenue Code. Although it may be new to you or your accountant, the 1031 exchange rule was created back in 1954 as an amendment of Section 112(b)(1) of the tax code. The details have been altered over the years, but the essential spirit of the law has remained. Essentially, the 1031 exchange allows for the tax-deferred exchange of like-kind property under certain circumstances. As recently as 2017, Section 1031 property categories included assets like collectible art, securities, franchises, and more. However, with the passing into law of the Tax Cuts and Jobs Act of 2017, as of December 22, 2017, the only property category allowable under Section 1031 is real estate.