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Replacing your investment property tax-free (1031 exchange)

If your investment real estate is sitting on a comfortable gain, you may be wondering what you can do with this new found wealth. Simply selling the property would put a stop to your rental income and the gains would be taxed. A better strategy might be to replace your real estate with something better. Using a 1031 exchange, you can sell your current rental property, find something new and not pay any capital gains tax.

Certain rules must be followed, but if you’re successful, you could defer the entire capital gain from your real estate while upgrading to something more expensive, bigger, better, something that might produce even more rental income.

To keep gains long-term, you must have had your rental for at least 1 year, so this strategy excludes house-flippers. Selling the property, the proceeds would then have to be placed in a separate, intermediary account, preferably managed by a custodian familiar with 1031 exchanges. You have 45 days from the time you close your current property to put together a list of the properties you might want to buy. You then have 180 days to complete the exchange and title must be transferred into your ownership by this time. Deviation from these rules could disqualify your exchange, making the sale of your property taxable.

This process can be repeated, theoretically deferring your capital gains forever. Every year or two, it could be part of your retirement strategy to exchange your investment real estate and upgrade to something better, increasing your passive income from charging higher rent.

For those who want even more options with their real estate, it’s possible to exchange into a real estate investment trust (REIT), deferring your gain into a non-tangible investment, managed by professionals, while enjoying potentially higher investment income.

There are many risks to completing an exchange which is why you should have a solid advisory team in place. Your tax advisor, realtor, and intermediary should all be familiar with 1031 exchanges. Your state may also require that you have a real estate attorney involved in the transaction.

At Eureka Wealth Management, I work with my clients to find the most tax-advantageous strategy with their real estate and will work with their other professionals to ensure a smooth exchange. I also provide advice on retirement, net worth, cash flow, investment, insurance, tax and estate strategies. Call for a free, initial consultation at (760) 537-0791 or online at


“Loopholes of Real Estate (Rich Dad’s Advisors)” by Garrett Sutton.

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