The Power of Tax Deferral
Section 1031 of the Internal Revenue Code allows investors to sell an investment property and defer all capital gains taxes by reinvesting the proceeds into a 'like-kind' replacement property. For real estate, like-kind is broadly defined — you can exchange an apartment building for an office building, raw land for a shopping center, or a single-family rental for a warehouse. The tax savings are substantial: selling a property with $500,000 in capital gains at a combined federal and state rate of 30% would trigger $150,000 in taxes. A 1031 exchange defers this entire amount, allowing the full proceeds to be reinvested. Over multiple exchanges across a career, investors can defer millions in taxes, and at death, heirs receive a stepped-up basis that eliminates the deferred gains entirely.