What is I.R.C. Section 1031?

What is 1031? | The “Basics” | Terminology | Calculating Gain | Investment Newsletter

The Internal Revenue Code Section 1031 is the means by which a seller of property held for use in investment, business or trade may defer payment of taxes on gain by exchanging that property for other like-kind property which is also being held for investment, business or trade. Keep in mind the tax is deferred but not avoided, except in the case of death of the taxpayer. (Please see your tax advisor) The deferral is accomplished by carrying the tax basis in the property exchanged (relinquished) to the property acquired.

Why should I consider an Exchange?

The primary reason an Exhangor would consider a tax-deferred exchange is to avoid immediate tax liability. Allowing the Exchangor to keep his/her earning power. A person who has no tax liability does not need to exchange. Finally, most investors exchange to leverage. This could be in the form of leveraging from a lower valued property to a higher valued property utilizing the equity, which has been accumulated.

Some exchange to because their investment strategies have changed. As an example, one could go from owning several rental properties into one large rental complex. Investors also exchange because they move. They prefer to have their investments nearby.

Like Kind Real Property

Most real property will be like kind to other real property. Do not get mislead by the myth that if you sell a duplex you must exchange for another duplex. (Call IAG for more details) Furthermore there are exceptions. You cannot exchange property outside the U.S. Foreign real property is not like-kind property.

A partnership interest is not real property. An interest in a partnership, even one that holds title to real property is not exchangeable. Please contact your tax advisor then call IAG for more details.

NOTE: ALWAYS CONSULT YOUR TAX ADVISOR!

 

 

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