Gold and silver are eligible for 1031 tax deferral treatment as long as 1031 exchange requirements are satisfied. One of the 1031 exchange requirements is predominant use or location either in the United States or overseas. Internal Revenue Code (IRC) § 1031(h)(2)(A) states that “personal property used predominantly within the United States and personal property used predominantly outside the United States are not property of like kind.”

Given today’s real estate market where the lure to fix and flip is a part of mainstream reality TV, a question often in the mix is whether a 1031 exchange will defer the capital gains taxes? With the newly renovated property, the next step is to either hold or resell. If the property is resold within a year of the purchase, the short term federal and state capital gains taxes can eliminate upwards of 40 percent of the gross profit. Can a 1031 exchange defer these taxes is now a question the investor or dealer must understand.

The 1031 Exchange General Rule

Often, the sale of property results in a financial gain. That financial gain, in turn, can incur capital gains taxes. Section 1031 of the Internal Revenue Code, however, provides for an exception to the general rule regarding capital gains taxes when certain property is sold and exchanged for “like-kind” property. According to the Internal Revenue Code, a 1031 Exchange applies to “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.”

There is a misconception to what satisfies the Internal Revenue Code (IRC) requirement for 1031 exchange replacement property. Many believe, and correctly so, that the 1031 exchange replacement property must be “like-kind.” The 1031 code clearly states that property is to be exchanged for like-kind or like class property. The application is different for real and personal property.

An aircraft exchange can be the suggested outcome from your CPA when determining the tax consequences of selling a plane. Like all capital assets, selling an aircraft triggers a tax on both the gain and depreciation. If the plane’s selling price is higher than the purchase price, a federal and state capital gains tax can result. Given 50 percent -- and recent 100 percent -- bonus depreciation, allowing the purchase price to be quickly written off, the outcome is a 25 percent recapture on the depreciation taken, which can be substantial.

Section 1031 of the Internal Revenue Code (IRC) requires the knowledge of many 1031 exchange tax rules. Violation of just one can jeopardize the tax deferral. In addition to the federal requirements, each state can legislate their own requirements as have Washington, Oregon, California, Idaho, Nevada, Colorado, Virginia and Maine. The state provisions focus on the protection of their constituents and how to best filter the 1031 exchange accommodator, or qualified intermediary, by defining minimum insurance requirements and how exchange funds are protected.

A 1031 exchange is many things but at the core, it is a tax deferral. When real and personal property is held for productive use in a trade, business or for investment is sold, federal and state capital gains and recaptured depreciation taxes are triggered that can amount up to 40 percent of the sales price. The tax is postponed when replaced with like-kind property within 180 calendar days of when the real or personal property was sold. The tax obligation does not go away unless you pay the tax, die or donate the property to a charity.

The kids have grown, the company no longer uses the property as a retreat, the taxpayers want to downsize or the price offered represent a number of reasons why taxpayers decide to sell their ranch. When selling, taxpayers want to know what the tax implications are, if the capital gains taxes can be deferred, and what planning steps are required.

Deferred gain is the postponement or delay of paying the recognized gain. Recognized gain is the tax triggered when an asset is sold and determined by imputing the appropriate federal and state capital gains rate and recaptured depreciation tax rate of 25 percent on depreciation taken. Recognized gain is the tax paid on the realized gain.

The character of a 1031 exchange property or primary residence can always be converted between personal and rental use. A property acquired as a rental property in a 1031 exchange can be converted to a primary residence by the facts that support the intent. Time is one fact of many, while additional supportive facts include where children attend school, where mail is received and the address registered with the local voting authorities.