If you are a property investor who wishes to sell one property and buy a new one, you can avoid paying the capital gains tax on the property you are selling through the 1031 exchange. This can be a huge savings: between federal and state, capital gains taxes can eat up 20-30% of your sale price. But the government wants to encourage investors to continue investing and providing rentals to communities, so they supply this loophole that keeps investors from losing money.

Basically, anything sold is subject to taxes. That's why the 1031 exchange is referred to as an exchange and requires an intermediary. If the money goes through your hands, then it becomes taxable. Hiring an intermediary will cost you, on average, between $1,000 and $2,000. Due to the highly technical process, hiring a qualified, experienced intermediary is essential.

You must move fairly quickly when using the 1031 exchange, which is why working with a real estate agent who is familiar with both investment properties and the 1031 exchange is so important. Within 45 days from the day of selling the first property, the seller must identify the property or multiple properties that he or she wishes to buy. Then, within 180 days or by the date the buyer/seller's tax return is due, whichever comes sooner, the buyer/seller must receive the replacement property. Additionally, the new property should be equal or greater in value to avoid paying any capital gains taxes; if the new property has a lesser value, then the remaining capital is taxable.

If you are looking into "exchanging" your old rental property for a new one, take a look at some of the investment properties currently on the market on my website, or you can contact me for a comprehensive, customized search.