1031 exchange is not a tax avoidance, but rather a tax deferment. For example, if you have a property that you sell for $200,000 rather than paying the 20% tax rate, if that’s your tax rate you have to pay the $400,000. If you have a like property in mind, you can roll all $2,000,000 into other property and you’ll be able to keep your funds working for you. It gives you some extra leverage on the property.
The 1031 exchange is an internal revenue code that allows an investor to sell a property and to buy another property and the capital gains could be reinvested in that and don’t have to be taxed. There are a couple of rules that you have to follow. Firstly, it has to be the same tax payer that sells a property has to be buying the property. Secondly, there is a 45 day identification period. Thirdly, 180 days is the time frame for buying the other property, and fourthly, you have to have what is called the trade-up definition, and the next asset has to be the same price or greater.