1031 Exchange

Whenever you sell business or investment property and you have a gain, you generally have to pay tax on the gain at the time of sale. IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax-free.

Who qualifies for the Section 1031 exchange?

The exchange can include like-kind property exclusively or it can include like-kind property along with cash, liabilities and property that are not like-kind. If you receive cash, relief from debt, or property that is not like-kind, however, you may trigger some taxable gain in the year of the exchange. There can be both deferred and recognized gain in the same transaction when a taxpayer exchanges for like-kind property of lesser value.

Owners of investment and business property may qualify for a Section 1031 deferral. Individuals, C corporations, S corporations, partnerships (general or limited), limited liability companies, trusts and any other taxpaying entity may set up an exchange of business or investment properties for business or investment properties under Section 1031.

Key Takeaways

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Tax Break

A 1031 exchange is a tax break. You can sell a property held for business or investment purposes and swap it for a new one that you purchase for the same purpose, allowing you to defer capital gains tax on the sale.

Escrow

Proceeds from the sale must be held in escrow by a third party, then used to buy the new property; you cannot receive them, even temporarily.

Like-kind

The properties being exchanged must be considered like-kind in the eyes of the IRS for capital gains taxes to be deferred.

No limit

If used correctly, there is no limit on how frequently you can do 1031 exchanges.

*All information sources from IRS website. For individual cases, please consult with your tax advisors.