1031 exchange


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Tax-Free Exchange

Under Section 1031 of the Internal Revenue Code, the exchange of two assets of like kind, even if of different quality, that are used for a business or for investment purposes. The goods exchanged are not assessed capital gains taxes. More precisely, capital gains taxes are deferred until an asset is resold with no intention of reinvestment. Tax-free exchanges also apply if one sells an asset with the intention to use the proceeds to buy a similar asset. For example, if a farmer sells his farm and uses the money to buy another farm, capital gains taxes are likely deferred on the money he made on the sale of the first farm. The same would be true if the he traded farm for farm.

1031 exchange

(pronounced “ten thirty-one exchange”) From Section 1031 of the Internal Revenue Code, the ability to exchange like-kind property and defer paying taxes on the gain realized.Under normal circumstances,if a party purchases Blackacre for $10,000 and then exchanges it for $100,000 in cash,there is a gain of $90,000 on which income taxes must be paid.But,because of §1031,if Blackacre is exchanged for like-kind property,then the gain is realized (meaning it occurs) but is not recognized (meaning no tax is due at that time).

The property given up is called the relinquished property, and the property received is called the replacement property. After the exchange, the basis in the relinquished property becomes the basis in the replacement party. In other words, the $10,000 purchase price for Blackacre, called the basis, becomes the basis of the replacement property. When the replacement property is sold later for $150,000, the gain would be $150,000 less $10,000, not $150,000 less $100,000. That is true unless you do another 1031 exchange at that time. There is currently no limit on the number of exchanges you can do in a lifetime.

The properties must be qualifying use properties, meaning that they have or will be held for income production (rental) or investment, or used in a trade or business. Personal residences and vacation homes are not qualifying properties.

Swapping properties is a very handy tax tool, but it is relatively rare to find property owners who want to exchange properties at a simultaneous closing. As a result, the IRS allows the use of a fiction, a type of like-kind property proxy. In the fiction, the owner of Blackacre may sell it for cash, but the money must be placed in the hands of a qualified intermediary to hold. It is said the taxpayer can never have his or her fingerprints on the cash—not to spend, not to borrow against, nothing. The taxpayer then has 45 days to identify a replacement property and complete a form with the identification information. After that, the taxpayer has a short time to close on the replacement property, for which the funds in the hands of the qualified intermediary may be used. If all this is done exactly right, the taxes will be deferred.

References in periodicals archive ?
The article introduces readers to 1031 Crowdfunding and explains how the company is improving the 1031 exchange process and offering exchangers successful and effortless exchanges by presenting turn-key 1031 exchange solutions through its proprietary crowdfunding platform.
1031 exchange, otherwise known as a 1031 exchange or like-kind exchange, occurs if, within 180 days, an asset being relinquished is replaced (i.
com)-- Nationwide 1031 Exchange, LLC today announced that it will be hosting Thomas Phelan, a renowned speaker and leader in the 1031 Exchange industry on October 23, 2014.
The bank was accused of aiding and abetting Summit 1031 Exchange in a Ponzi scheme.
A 1031 exchange offers significant benefits to commercial real estate investors because it permits them to defer capital gains taxes and thus preserve their investment capital.
Taking advantage of tax-saving strategies such as the 1031 Exchange can further leverage their profits.
COMBINING COST SEGREGATION AND SECTION 1031 exchange allows taxpayers to defer the maximum amount of income taxes.
An interest in a REIT is defined as a security and therefore will not qualify as a replacement property for a section 1031 exchange (Letter Ruling 8206109).
The 1991 IRS exchange regulations have made the 1990s "The Golden Era of the 1031 Exchange.
Over the past four years, hundreds of victims - both corporations and consumers -- have lost enormous sums of money, life savings, and suffered significant tax liabilities due to theft and speculative investment of 1031 exchange funds by QIs.
The IRS is taking a closer look at the "held for" requirement in 1031 exchanges to determine if one or both of the properties involved in a 1031 exchange were held for purposes other than use in a trade, business, or as an investment.
Generally speaking, the basis of property acquired in a 1031 exchange is the same as the basis of the property exchanged.