Can a Real Estate IRA benefit from a 1031 exchange?

Principal and earnings in an IRA can generally move tax free from one asset class to another, so a 1031, which allows you to defer any taxable gain on exchanges of like-kind assets (like real estate for real estate), is rarely needed.

However, IRAs may have taxable income (and taxes) when assets, including real estate, are purchased with non-recourse debt financing and subject to UDFI. In that specific case, the IRA may take advantage of the 1031 rules and exchange the first debt financed property for another. It's most common to see that exchange being real estate for real estate. The result is that all or most of the IRA income taxes continue their deferred status.

Many IRA investors believe that acquiring a cash flowing real estate property with funds they have available in their IRA maximizes the value of their account. In fact, even more retirement account holders aren't aware that an IRA may borrow money from a bank or private lender to purchase property. An IRA with $100,000 can easily have the purchase power of $300,000 or more. Leverage is seldom, if ever, available with securities investments in IRAs—another benefit to non-traditional IRAs.