What is a 1031 Exchange?
In a nutshell…
If your real estate is worth more now than when you bought it, you’ll owe tax when you sell.
However, if you use Reliant 1031 to reinvest in more real estate, then you don’t pay that tax!
It’s sort of like borrowing money from the IRS…with no interest.
Is that legal?
Absolutely! This law comes from the US Code in the Internal Revenue Code Section 1031, which has been around for over 100 years. It starts like this:
No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like kind which is to be held either for productive use in a trade or business or for investment. IRC §1031(a)(1)
So the law actually states that you *shall not* recognize any gains when you exchange real estate! (Obviously there are a lot of rules and exceptions).
A 1031 exchange is even “blessed” by the U.S. government by many safe harbors (most notably the ones in CFR §1.1031). The IRS also offers extensive guidance on this topic. For example, check out page 16 of IRS Publication 544.
Is that free money?
Yes…and no.
You can avoid the tax indefinitely by completing a 1031 exchange every time you sell. So you can borrow against the government forever. However, you pay all the deferred tax if you cash out.
Some technical stuff…
When you do a 1031 exchange, your New property gets a lower basis. Basis is the cost of all the cash and debt you’ve invested. If you sell a property for the same price as your basis, then your gains are $0. If you sell for less than your basis, then you have a loss.
When you complete a 1031 exchange, your Old basis carries forward into your New property. So all the gains that were deferred on the Old property will attach themselves to the New property. This is what you want! But if/when you cash out, your interest-free loan from the IRS is gone.