What is the primary purpose of a 1031 exchange?

What is the primary purpose of a 1031 exchange?

• A. To avoid all taxes on sale
• B. To defer capital gains taxes by exchanging for like-kind property
• C. To increase leverage
• D. To postpone taxes by swapping for like-kind property with different use

Answer: (B)

The main idea behind a 1031 exchange is to defer capital gains taxes by swapping one investment property for another like-kind property instead of cashing out. The goal isn’t to avoid taxes entirely, but to keep the proceeds working in real estate by reinvesting in a property that qualifies under the like-kind rules. Both properties must be held for investment or business use, and the properties are real estate, with the like-kind standard being broad (for example, a rental house can be exchanged for another income property). When you do this correctly, you defer the taxes that would normally be due on the sale, though taxes can later come due if you later sell without another like-kind exchange or if depreciation is recaptured. This is why the best answer describes deferring capital gains taxes by exchanging for like-kind property.

The main idea behind a 1031 exchange is to defer capital gains taxes by swapping one investment property for another like-kind property instead of cashing out. The goal isn’t to avoid taxes entirely, but to keep the proceeds working in real estate by reinvesting in a property that qualifies under the like-kind rules. Both properties must be held for investment or business use, and the properties are real estate, with the like-kind standard being broad (for example, a rental house can be exchanged for another income property). When you do this correctly, you defer the taxes that would normally be due on the sale, though taxes can later come due if you later sell without another like-kind exchange or if depreciation is recaptured. This is why the best answer describes deferring capital gains taxes by exchanging for like-kind property.