Let’s say that you own a house that you rent out. So it’s an investment property. You’ve owned the place for 10 years and it has gone up in value since you bought that. We’ll lets say you found a good deal on another property and wanted to buy that but you had to sell the original house first in order to do it.
What a 1031 exchange allows you to do is to take the gains on house number one and put it into house number two without paying taxes on it.
There are a few rules to 1031 exchanges… #1 is that you have to buy house number to within 45 days of selling house number two and #2, that properties have to be ‘like-kind’. That’s a pretty broad definition. Meaning you usually can buy land if you sell a house. But the most important rule to this is that they both have to be investment properties. You can’t sell a rental home and buy a home that you’re going to live in and expect to be able to do a 1031 exchange with it.