A 1031 Tax Free Exchange is a way for a property investor to avoid paying capital gains tax on the sale of a investment when the investor plans to re-invest those gains in the purchase of a replacement property.

If the proceeds for the sale are handled by you than you are no longer able to do a 1031 exchange.

It is important to remember the profit from the sale must stay in escrow till you re-invest. If the money touches your hands you risk losing the 1031 Tax Free Exchange.

An “Equity Trade” is a direct, across-the-table exchange of one property for another. The 1031 (or 1034) exchanges are usually non-owner properties. Section 1031 or 1034 on the IRS codes allow for deference of federal taxes on any gains providing the property is traded for property and not cashed out.

The replacement property must be “like-kind”. This means that if you are selling an investment property you must replace it with another investment property; you can’t use it to purchase a primary residence.

Using a proper 1031 Exchange company is always important. Contact your local Title Insurance office to see if they have an in house exchange service or can direct you to a trusted company in your area.

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