Note: This article is not meant as tax or legal advice and you should always check with your Accountant and/or Real Estate Attorney to verify your current tax options.

Has your business or investment real estate become unprofitable, does it require large or growing maintenance expenses, or has it reached the peak of its value (making it a lackluster investment)?

If so, you would probably like to have a more profitable investment but are concerned about the tax consequences of acquiring new and different properties.

Because of internal revenue code 1031, it is possible to relieve yourself of current properties and make new real estate investments while remaining tax-free.

One or more properties can be sold and reinvested in any number of other properties and an unlimited number of times without being subject to the normal income tax from a sale as long as they are like-kind exchanges.

This exchange can even take place with properties under development, and as much as six months after the sale of your current holdings. In a like-kind exchange no gain or loss is recognized unless unlike property is received in the transaction, in which case only a portion of the gain would be taxable and the rest tax deferred. This process is called a “tax deferred exchange”.

The tax deferred exchange poses myriad benefits, but it can be easy to invalidate a tax-free exchange without a comprehensive understanding of the forms and codes.

Meeting the requirements of a “trade or business or investment” property, filing for a delayed exchange, establishing intent, and working with a facilitator who can hold funds during the exchange process are all crucial and if done incorrectly can cause an exchange to be invalidated by the IRS. For these complexities consulting an expert is invaluable.