Hello,
I am very confused on what a 1031 tax exchange is and how it will benifit me.
Can somebody please explain this to me.
The issue or reason for a 1031 exchange is this. Your investment property appreciates in value, which creates a capital gain. The capital gain tax is realized when you sell the investment property. If you actual pay the capital gain tax you lose a nice chuck of cash that could be used to reinvest in more (like-kind) investment property.
The 1031 exchange allows you to sell your existing investment property (relinquished property) and acquire one or more replacement properties without paying any capital gain taxes so that you have 100% of your investment still working for you. The capital gain tax is deferred into your new property(ies), and you can continually defer your capital gain taxes as long as you continue to exchange.
The long term effects of tax deferred exchanges on your cash flow and net worth can be staggering because you have deferred the payment of your capital gain taxes and kept your money invested.