Which statement best describes a 1031 tax-deferred exchange?

Which statement best describes a 1031 tax-deferred exchange?

• A. It allows an investor to avoid taxes on gains indefinitely
• B. It defers capital gains taxes when selling a property if a like-kind property is purchased within a set period
• C. It offsets capital gains for homeowners who lived in a home for two years
• D. It provides a tax shelter for non-real estate investments

Answer: (B)

A 1031 exchange lets an investor defer paying capital gains tax by swapping one investment property for another like-kind property. The crucial point is tax deferral, not elimination, and it only applies if the replacement property is a like-kind real estate held for investment or business, with strict timing: you must identify a replacement within 45 days and complete the purchase within 180 days. If you meet these rules and don’t take cash (boot), the gain is not recognized at the time of the exchange, and your basis in the new property is adjusted accordingly. Taxes will be due later if you eventually sell without another like-kind exchange or if you receive cash. This doesn’t apply to primary residences or to non-real estate investments, and it doesn’t erase taxes forever.

A 1031 exchange lets an investor defer paying capital gains tax by swapping one investment property for another like-kind property. The crucial point is tax deferral, not elimination, and it only applies if the replacement property is a like-kind real estate held for investment or business, with strict timing: you must identify a replacement within 45 days and complete the purchase within 180 days. If you meet these rules and don’t take cash (boot), the gain is not recognized at the time of the exchange, and your basis in the new property is adjusted accordingly. Taxes will be due later if you eventually sell without another like-kind exchange or if you receive cash. This doesn’t apply to primary residences or to non-real estate investments, and it doesn’t erase taxes forever.