In the simplest terms, a 1031 exchange is a tax deferred swap of a business or investment property for one or more properties of like kind. The 1031 tax-deferred exchange is a strategy commonly used by real estate investors and owners of appreciated investment properties.
We can help you evaluate the benefits, features and risks of a 1031 exchange.
The 1031 Exchange Time Line
With real estate, the Internal Revenue Code guidance on “like-kind” properties is broad and most real estate will qualify for an exchange. For example, vacant land may be exchanged for commercial real estate or a residential rental property.
Be sure to review the IRS guidance for tax-deferred exchanges with your tax advisor for your specific situation.
General Guidelines for 1031 Exchange
1
Purchase
equal or greater
in value.
2
Reinvest
all of the equity
in replacement
property.
3
Obtain equal or
greater debt
on replacement
property
In a 1031 transaction the capital gains taxes are deferred, not eliminated. It is important to note that when the replacement property is ultimately sold the original deferred gain and any additional gains on the replacement property will be subject to tax. The exception being if the replacement property is sold as part of another 1031 exchange. Taxpayers must report an exchange to the IRS on Form 8824, Like-Kind Exchanges and file it with their tax return for the year in which the exchange occurred. While 1031 exchanges require careful planning and close oversight, they can be a powerful tool to preserve an investor’s purchasing power.
Material discussed is meant for general illustration purposes and/or informational purposes only and it is not to be construed as investment advice. Please note that individual situations can vary therefore individuals should consult their tax and other advisors when considered such transactions.
