1031 or Like-Kind Exchanges – Real Estate Tax Help
WHAT IS A 1031 EXCHANGE
A 1031 exchange makes it possible for investors to sell and buy property of like kind while deferring tax consequences. This transaction is authorized by section 1031 of the IRS code and offers investors a reliable strategy for the protection of their real estate assets.
A successful 1031 exchange allows the investor to reinvest 100% (or less) of the equity from the sale of a property into the purchase of a preferred replacement property without recognizing any gain. This type of property sale and reinvestment can either be done through a simultaneous or delayed 1031 exchange.
In most cases a 1031 exchange is done as three-party delayed exchange also known as a “Starker Exchange” in which an intermediary ensures a reciprocal transfer of the properties and provides a “safe harbor” against the actual receipt of exchange funds. It is extremely important that this process be done correctly, otherwise, a taxable event may occur.
ADVANTAGES OF A 1031 EXCHANGE
1031 exchanges provide real estate owners with a range of opportunities to meet personal investment objectives including increased leverage, improved cash flow, diversification, reduction of management obligations, geographic relocation and/or consolidation. The tax dollars saved by an exchange may be maximized to increase an investor’s overall net worth. Ultimately, the exchange process allows investors to reorganize and improve their real estate portfolios to best suit their unique interests and needs. Strategic Tax and Wealth Planning can further maximize the value of current and future assets.
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 PROPERTY EXCHANGES
Like-Kind Property Properties are of like kind if they are of the same nature or character, even if they differ in grade or quality. Personal properties of a like class are like-kind properties. However, livestock of different sexes are not like-kind properties.
NOTE: Also, personal property used predominantly in the United States and personal property used predominantly outside the United States are not like-kind properties.
Real properties generally are of like kind, regardless of whether the properties are improved or unimproved. However, real property in the United States and real property outside the United States are not like-kind properties.
IRS Publication 544, Sales and Other Dispositions of Assets
IRS Form 8824, Like-Kind Exchanges
TIC Tenant in Common Guide
Commercial Real Estate Glossary