Section 1031 of the tax code allows real estate and personal property owners, who have investment or business assets, to “exchange” the assets for like-kind of business or investment assets without recognizing a taxable gain on the old assets.
Why is this important?
Section 1031 allows taxpayers to avoid paying capital gains taxes until the property is sold or proceeds are received. This allows property owners to reinvest proceeds with the ultimate goal of achieving higher levels of income and asset appreciation.
For example, you can exchange assets to achieve a greater cash flow or diversify or consolidate your investment portfolio. You can relocate your assets anywhere within the United States, and it can help your heirs if they plan to inherit your assets.
Terms to Know
Delayed Exchange: When the property is sold first and then another property is acquired. This is subject to certain rules and the taxpayer has up to 180 days from the transfer of the relinquished property to acquire the new one.
Reverse Exchange: When the new property must be acquired prior to the closing of the original property. This exchange requires an exchange accommodation titleholder (EAT) to hold the title to the replacement property until the original is old. The sale of the original property must be completed in 180 days.
Improvement Exchange: When improvements are done to the replacement property. The EAT must take the actual title of the replacement property until construction is complete. Again, the transaction must occur within 180 days.
Non-Safe Harbor Build-to-Suit: This is when the improvement exchanges cannot be completed within the 180 days. In this case, the exchange needs to be restructured and involve a third party with beneficial and significant interests to hold the title during the transaction.
This is just a quick description of a very complicated process. You will need to learn about whether your property qualifies, important rules and restrictions and how to start the process. As a result, it is important you seek professional help when you are considering a 1031 exchange. For more information, get connected with a land consultant, speak to a tax advisor or visit https://fea.memberclicks.net/1031-faqs.
Special thanks to IPE 1031 for serving as the source for this description. Their reference guide is available at https://ipe1031.com/wp-content/uploads/2020/12/Reference-Guide-2018.pdf.
