Note: The information provided herein has been collected from the IRS Website and is not guaranteed or endorsed by Bob and Linda Lario. For more information, please contact www.irs.gov or a 1031 exchange qualified intermediary.
What is a 1031 Exchange?
Astute real estate investors know to take advantage of the IRS Code, Section 1031 to defer capital gain taxes on real estate until a later date. Under Section 1031 of U.S. tax law, certain types of properties (income-producing real estate being one of them) can be "exchanged" without immediately paying capital gains tax, if certain criteria are met. This has obvious advantages to a real estate owner or investor looking to sell one property and "trade up" into another, more expensive piece of real estate.
For example, if you paid $100,000 for an apartment building 20 years ago and now want to sell it for $500,000, you have a capital gain of $400,000. With an IRS 1031 exchange you can defer paying any capital gain tax indefinitely (this is a very simplified explanation). Note: Please visit the IRS website at www.irs.gov and consult a tax professional first.
Section 1031 refers to all types of property but the name has become synonymous with real estate exchanges. Completing a 1031 tax-deferred exchange can be as easy or as complicated as you would like to make it. The IRS provides all United States real estate investors and income property owners the ability to let their equity in income-producing real estate grow tax free until the day comes when you sell the property (properties) outright or you die.
Like-Kind Exchanges - Real Estate Tax Tips
Generally, if you exchange business or investment property solely for business or investment property of a like kind, no gain or loss is recognized under Internal Revenue Code Section 1031. If, as part of the exchange, you also receive other (not like-kind) property or money, gain is recognized to the extent of the other property and money received, but a loss is not recognized.
Section 1031 does not apply to exchanges of inventory, stocks, bonds, notes, other securities or evidence of indebtedness, or certain other assets.
Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. The exchange of real estate for real estate and the exchange of personal property for similar personal property are exchanges of like-kind property. For example, the trade of land improved with an apartment house for land improved with a store building, or a panel truck for a pickup truck, is a like-kind exchange.
An exchange of personal property for real property does not qualify as a like-kind exchange. For example, an exchange of a piece of machinery for a store building does not qualify. Also, the exchange of livestock of different sexes does not qualify.
An exchange of city property for farm property, or improved property for unimproved property, is a like-kind exchange. The exchange of real estate you own for a real estate lease that runs 30 years or longer is a like-kind exchange. However, not all exchanges of interests in real property qualify. The exchange of a life estate expected to last less than 30 years for a remainder interest is not a like-kind exchange.
An exchange of a remainder interest in real estate for a remainder interest in other real estate is a like-kind exchange if the nature or character of the two property interests is the same.
Note: The above information references an Internal Revenue Code (IRC) section. A link to the Internal Revenue Code is included for the convenience of those who would like to read the technical reference material. To access the applicable Internal Revenue Code sections visit the U.S. House of Representatives Downloadable U.S. Code page.
Publication 544, Sales and Other Dispositions of Assets
Form 8824, Like-Kind Exchanges (PDF)
Text and information courtesy of the Internal Revenue Service.
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