Understanding the 1031 Exchange

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“No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment.”
–IRC Section 1031 (a)(1)

The Internal Revenue Code 1031 allows an investor to defer all capital gain taxes, when they sell a property and reinvest the proceeds in a property of like kind. When executed properly, 1031 exchanges protect investors from capital gain taxes, facilitate significant portfolio growth, and increase return on investment. It is extremely important to understand the exchange process, in order to access the full potential of a 1031 exchange.

What are the benefits of a Section 1031 tax deferred exchange?
• Leverage
• Diversification
• Management relief

Why should you exchange rather than sell?
Allowing investors to defer all capital gain taxes is essentially a long-term, interest-free loan from the IRS. The tax savings gives investors more purchasing power, which is the real advantage to exchanging.

What are the requirements for full tax deferral?
An exchanger must reinvest all of the new proceeds in “like kind” replacement property or properties. They must also have the same amount or greater amount of debt in the replacement property or properties.

What type of property can be exchanged?
Any property held for productive use of trade or business or for investment can be exchanged for any other property held for productive use of trade or business or for investment. These properties are considered “like kind.”

Examples of like kind property include exchanging:
• Unimproved for improved property
• A fee interest for a leasehold with 30 or more years left
• Vacant raw land for a commercial building
• A single family rental for a small apartment complex

How does the IRS determine if a property is held for primarily investment purposes?
The IRS determines an exchanger’s intent by analyzing the following factors:
• The nature and purpose of the acquisition
• The length of ownership
• The extent and nature of the exchanger’s efforts to sell the property
• The number, extent, continuity, and substantiality of sales
• The use of a business office for the sale of the property
• The character and degree of exchanger’s supervision in property sales

Infinity Abstract & Title is happy to serve the community with their real estate and title expertise. If you have any questions concerning Section 1031 tax deferred exchanges, contact us at 813-931-0840 or today! Read More.