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1031 Like Kind Exchange

 
Like Kind 1031 Exchange

The capital gain tax implications on the sale of real or personal property held in the productive use of a business or held for investment can be quite substantial, often bringing into question whether or not the sale is still beneficial to the Taxpayer. A Section 1031 like kind exchange (dubbed after Section 1031 of the Internal Revenue Code) is intended to delay the tax on a capital gain to a time in the future. Here is what a person contemplating a 1031 exchange should know.

Like-Kind Exchange Insight

 
Like-Kind Exchange

The term “like-kind exchange” describes the federal and state capital gains tax deferral strategy requirement of an Internal Revenue Code (IRC) Section 1031 tax deferred exchange that properties exchanged must be like-kind to one another. A 1031 exchange effectively defers the gain triggered by the sale that can represent upwards of 40 percent of the property’s sales price. The like-kind exchange represents an indefinite, interest free loan that is due when the replacement property is sold, unless the basis is stepped up to the taxpayer’s heirs or another like-kind exchange is initiated.

1031 Exchange or Pay Capital Gains Tax

 
Selling an Heirloom Violin, Consider a 1031 Exchange

A 1031 exchange represents a solid strategy for deferring the capital gains and recaptured depreciation taxes when selling and replacing like-kind, real and personal property held for productive use in a trade, business or for investment. These tax deferrals, along with asset liquidity, are the core benefits of the 1031 exchange.

1031 Exchange Rules: Reporting a Like-Kind Exchange

 
1031 Exchange Rules: Reporting a Like-Kind Exchange

Internal Revenue Service Form 8824, “Like-Kind Exchanges,” is the two-page form to report gain or loss on a 1031 exchange. The form is filed along with the taxpayer’s federal income tax return to support their intent to initiate and secure the 1031 tax deferral for gain or loss from property held for and replaced by property held for productive use in a trade, business or for investment. When exchanging real estate, the title or closing attorney submits a 1099 to the Internal Revenue Service and provides a copy to the taxpayer. The 1099 reflects the gross sales amount received for the real property. Form 8824 represents the taxpayer’s reporting on how those funds were utilized.

1031 Land: Like-Kind Requirement

 
1031 Land Requirement

Often the question is asked whether in a 1031 like-kind exchange must land be exchanged for land. The answer is found in the like-kind requirement under Internal Revenue Code (IRC) Section 1031. To qualify for consideration in a 1031 exchange, the relinquished or old property and the replacement property must be like-kind. Property is either real or personal property held for productive use in a trade, business or for investment.

LKE Analysis

 
Like Kind Exchange Analysis

One of the fundamental rules of a 1031 Exchange is that the properties exchanged must be of “like-kind”. Given the importance of this rule, understanding what qualifies as “like-kind” is imperative to using a 1031 Exchange to your advantage. If the transaction qualifies for Section 1031 Exchange treatment though, the capital gains tax obligation can be deferred, potentially saving a substantial amount of money that can then be re-invested.

1031 Investment Property

 
1031 Investment Property

1031 investment property is real or personal property held for the proper intent as defined by Internal Revenue Code § 1.1031. 1031 exchanges allow the owner to indefinitely defer the federal and state capital gains and recaptured depreciation taxes triggered when the property is sold and replaced with like-kind property. Taxes are due when the replacement property is sold or deferred in another 1031 exchange.

1031 Exchange Insight

 
1031 Exchange

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.”

Bonus Depreciation Reduced: Impact on Like-Kind Exchanges (LKE)

 
100% Bonus Depreciation Ends

When H.R. 3765, the Temporary Payroll Tax Cut Continuation Act of 2011 was signed by President Obama on December 23rd, 100 percent bonus depreciation or the ability to quickly write off equipment purchases ended. Congress was not able to offset the expense with equivalent revenue generators.

1031 Exchange: Hospitals, Oil and Gas, Leasing Companies

 
1031 Exchange: Hospitals, Oil and Gas

1031 exchanges are not just for real estate. Personal property held for productive use in a trade, business or investment is also eligible for tax deferral when replacing with like-kind personal property. The Internal Revenue Code Section 1.1031 is available to individuals, trusts, limited liability companies, and corporations both - foreign and domestic. The benefit to property owners is the ability to adjust their portfolio of assets without having to pay the recognized gain or tax when the property is sold.

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