If you’re fortunate enough to find yourself in a position where you own a home that’s gained a lot of value since you bought it, you might be wondering how much of that equity you’ll have to give back to the government in taxes. More specifically, capital gains tax, which is the tax on profits from the sale of a home. The good news is, thanks to section 1031 of the internal revenue code, if done correctly, you don’t have to pay a cent. 

It’s a little thing called a 1031 exchange. Okay it’s not exactly little, it can actually be pretty complicated depending on your situation. Regardless, the premise is the same: While selling your home, you look for the next property that is “like-kind” in the eyes of the IRS. Once found, and there is usually a time limit on this (anywhere from 30-180 days depending on your situation), the proceeds from your sale must go to an intermediary that holds the funds during the exchange. Once the transaction is complete, the intermediary then delivers the funds to the seller of the new home purchases. And there you have it, a 1031 exchange.

There are some caveats to keep in mind, the first being that doing a 1031 exchange does not exempt you from paying taxes on the capital gains, you are simply deferring the capital gains tax. Now, that being said, if done correctly, there are no limits on how many times you can do a 1031 exchange and defer those capital gains. Remember how I said this can get pretty complicated? That’s because you can dive even deeper into this and discover things like reverse exchanges, delayed exchanges, built to suit exchanges, and so on. I am not going to get into these, as I am far from being an expert on them, or the subject altogether. When it comes to 1031 exchanges, you want to get all of your information from a qualified attorney that is looking out for your best interest. Attorneys are the key here, and they are the best place to start if you’re considering going down this road. Thanks for reading