1031 Exchanges
Posted by Andy Gustafson on Thu, Feb 02, 2012
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.
What is a 1031 Exchange? - Interest Free Loan
A 1031 exchange is an indefinite, interest free loan. Imagine being able to use 40 cents on the dollar indefinitely to purchase replacement property. On $100,000 and $200,000 the interest free loan can be upwards of $40,000 and $80,000 respectively. No loan paperwork needs to be submitted and you are automatically approved.
What is a 1031 Exchange? - IRC Statute
The Internal Revenue Code Section 1.1031 defines a 1031 exchange as “no gain or loss is recognized when property held for productive use in a trade, business or for investment is exchanged for like-kind property held for productive use in a trade, business or for investment.” The Internal Revenue Service refers to 1031 exchanges as tax-free exchanges because no tax is paid on the transaction until the replacement property is sold. There is no limit to the number of 1031 exchanges a taxpayer can initiate.
Every taxpayer in the United States is able to affect a 1031 exchange. Even non resident aliens or foreign individuals may use 1031 exchanges to defer paying capital gains and recaptured depreciation taxes. Partnerships, corporations, trusts and limited liability companies, both foreign and domestic, can exchange real or personal property and defer capital gains and recapture depreciation taxes.
What is a 1031 Exchange? - Property Replacement
A 1031 exchange is when real or personal property is exchanged for real or personal property. Real property is land, thirty-year leasehold interests, oil and gas royalties, commercial buildings, parking lots, trailer parks, marinas and rental properties. Properties located in the United States are replaced with any real property that is also located in the United States. Personal property is far more restrictive and must be replaced with “like-kind” or “like-class” personal property. An exquisite violin must be exchanged for an instrument, while an acrylic painting must be exchanged for an oil or acrylic painting.
What is a 1031 Exchange? - Proper Intent
A 1031 exchange is when the taxpayer’s intent at the time of sale and purchase is to hold the property for the proper intent and support it with facts consistent with the IRS 1031 exchange requirements of limited personal use and adequate hold time with the longer the better. Intents can change due to work, health and family or even mega trends impacting the property such as population shifts and traffic pattern changes that impact the economics of owning the property.
Contact our office to discuss your transaction before listing your property for sale or at the latest, before the closing. Once you close it is too late. Click below to ask a question.
