In addition to balancing an investment portfolio, real estate investments also offer important tax strategies. Americans would recognize mortgage interest as the most prevalent of real estate tax deduction. Serious real estate investors, however, would also consider Internal Revenue Code 1031 as a crucial tax deferment strategy and one of the key real estate tax deductions.

Under Internal Revenue Code 1031, investors are allowed to defer capital gains tax on real estate investments if they exchange the property for a “like kind” property. If, for example, an investor sells an apartment building held for a long period of time, the tax implications on the property’s appreciation could be substantial. The IRS provides a strategy for deferring the payment of this capital gains tax if the investor purchases another investment property within 180 days of relinquishing the original property and follows the other stipulations of this code. The investor does not, however, need to purchase another apartment building for the “like kind” provision to be met. In fact, for many investors, this provides an outstanding opportunity to relinquish the day-to-day management responsibilities of real estate management and, instead, reinvest the proceeds into a tenant-in-common investment through which institutional-quality real estate can be acquired.

Through this strategy, not only are real estate tax deductions achieved, but the investor also obtains a steady cash flow with the fractional ownership of property that could not be acquired by an individual investor.

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