This unique transaction is a well-kept secret to real estate investors. Would you believe that you could legally defer the taxes on your real estate investments? It’s called a 1031 Exchange. The 1031 Exchange allows you to roll over all of your net proceeds to another real estate investment.

Here are the steps for the 1031 Exchange

• After you sell your property, you must give all of your net proceeds to the 1031 exchange agent to hold in escrow. This agent must be independent from your attorney, accountant and broker. The agent must be a part of an escrow company or a bank. You cannot pull any of the profit out of this account for personal use.
  
  
• You must locate a property of like kind, meaning that it must be an income-producing property. For example, if you sold an office building, you could redirect your new investment for an apartment building. You could even buy two properties in exchange for the one property you have sold.
  
  
• You must close on your target property within 180 days from the date that the other property sold.
  
  
• You must apply ALL of the escrow proceeds to your new investment property.
  

How does this really work in your favor?

For example, if you netted $60,000 from your first property. You now invest that $60,000 as a 10% down payment towards a $600,000 property, following the 1031 Exchange rules. Four years later, you sell that property and net $160,000. You now can roll over that $160,000, along with the $60,000 down payment, to apply as a 20% down payment for a million-dollar property. In essence, the IRS is allowing you to build your investment portfolio tax-free!