If you are in possession of real estate that will provide you with a profit on the sale, you should evaluate whether a 1031 exchange is right for you. There are five different classes of property taxes: property used in the taxpayers’ trade or business, property held for the purpose of sale to clients, property used as a primary residence, property used as a vacation home, and property held for investment. .

The 1031 exchanges apply to both property held in a taxpayer’s trade or business and property held for investment and, in certain situations, property held as a vacation home. Please note the following stipulations:

• Property held for immediate sale is not considered an investment.

• Commercial use can be defined as the possession of property for productive use in business or commerce.

• Property that is retired from a prior “productive use” in the business may qualify

There are many possible benefits of using a 1031 exchange, as long as you are clear about the best way to maximize your benefits. Examples of benefits include:

• Own multiple buildings instead of just one

• Get leverage

• Deferral of the payment of taxes on capital gains

• Relocate to a new area

• Consolidation or improvement of buildings

• Get relief from property management

The real property you sell, as well as the real property you buy, must be kept for productive use in a trade or business or for investment purposes, and must be similar. To obtain the tax benefits, the proceeds of the sale must pass through a qualified intermediary and not through your own hands, not even briefly. If the funds pass through your hands at any time, any and all cash income you earn may be taxable.

There are many different types of properties that can be exchanged in this way. “Similar type” refers to properties that are similar in character or nature. Examples of similar popular properties can include commercial properties, condos, vacant lots, rental homes, duplexes, or apartments. Dissimilar properties are primary residences, promissory notes, corporate interests, stocks and bonds, properties that will be resold immediately, or developed lots that are held for sale purposes.

You should never attempt to handle the funds associated with a 1031 exchange on your own. Doing so can eradicate your capital gains tax deferral and make you pay taxes, eliminating one of the main reasons people seek 1031 exchanges in the first place.