Section 1031 Exchanges, or Like-Kind Exchanges. 1031 exchanges are a provision in the tax law that outlines a tax-deferred transaction within the real estate industry. The provision states that if one were to sell a piece of property, they may reinvest that money into another property without having to pay taxes on the previous sale’s profit at that moment in time. This does not mean, however, that the taxes are never paid, and other rules must be followed in order to qualify. Besides tax deferrals, 1031 exchanges allow participants to invest not only their money into new property but the government’s money as well. Over time, this results in healthy profit margins. 1031 Exchanges are Not for Everybody. Despite the 1031 exchange's monetary allure, there are many situations in which utilizing this provision would not be helpful or even detrimental to an investor. For example, 1031 does not benefit those who wish to diversify their investment, as the provision states that the profit must be re-invested into real estate. Also, an investor with large capital losses from other sources that would offset any gain from the real estate may also not want to employ a 1031 exchange. There are a few pitfalls. For one, any due date is a hard deadline, and if one were to miss a date, all of their money would become taxable, even if it were already reinvested in another property, which in some scenarios would leave the investor unable to pay the original tax. Also, the same taxpayer who sold the first property must be the same taxpayer who reinvests. 1031 Exchanges Require a Couple of Rules. Taxes must be paid for any money that is not reinvested after a sale. This allows for some degree of flexibility, as technically not every cent must be reinvested for one to qualify for a 1031 exchange. However, benefits will only befall the money that is. Also, when applying for a 1031 exchange, pay attention to any debt on the current/future property, as any debt relief is counted as money and therefore taxable. Applying for a 1031 Exchange Isn’t Difficult, but There Are Some Things to Watch Out For. Any money that you wish to be reinvested must not be touched. Instead, a QI (Qualified Intermediary) should handle it. Make sure to let your QI know which prospective properties you are interested in, as reinvestment must be done within 45 days. In addition to this strict 45-day deadline, closing must be finished within 180 days or by the due date of a tax return, whichever comes first. If you would like to engage in a 1031 Exchange, we recommend consulting a professional to make sure none of these crucial deadlines are missed. Reporting a 1031 Exchange, however, is less intimidating. 1031 exchanges are simply reported on the investor’s income tax form.