What Is a 1031 Exchange?

A 1031 exchange is a real estate method for tax deferment of gains on a property's sale. Instead of selling one property to collect a profit and then using the profit to purchase another, a 1031 option allows an individual to "exchange" equity in one property for that in another. The profit, then, is not received until the new property is sold. Taxes are not paid until that time.

Qualifying for a 1031 Exchange

The key to this maneuver is having two qualified properties that can be exchanged in a short time. The primary residence and the new home must both qualify for the tax law to apply based on the IRS rules. Ask your real estate agent if your properties qualify. If possible, seek a real estate company that specializes in 1031 exchanges for assistance. If both properties qualify, the 1031 must be carried out within a specific time frame. Essentially, the money can never be deposited in your account, spent by you in any way or otherwise benefit you in the short run. Instead, you are basically rolling over your current equity into equity in the new property. An escrow account may be used for this purpose.