If you are thinking of buying a property for investment purposes, you should read all you can about 1031 Exchanges. You don’t need to know anything about it when you buy; it’s when you sell that you should consider it. It’s a good way to defer federal taxes on your profit.
The Wall Street Journal has a good article on it.
By Perri Cappell
Last spring, Milford, Conn., resident Chris Hiza wanted to replace two rental properties he owned with other rental units that he thought would appreciate more in the long term. But instead of selling his two three-family rentals, paying taxes on the gains, and then using what was left to buy the new rentals, he made a 1031 exchange. This transaction allowed him to roll all the proceeds from selling the old properties into buying the new ones — without taxes being taken out of the gains.
The term "1031" refers to a section of the IRS code that allows real-estate investors to defer taxes on gains from the sale of investment properties as long as they put the money into buying other investment properties of equal or greater value. The seller must identify the property he wants to buy within 45 days of the sale of his existing property and complete the purchase within 180 days. A third-party intermediary normally handles the transaction.
Avoid These Errors In 1031 Exchanges