A Brighter Way
A Brighter Way
Property owners who expect to acquire replacement property should consider a like-kind exchange. A 1031 Exchange refers to a legal exchange that allows an investor to sell a property, to reinvest the proceeds in a new property and to defer all capital gain taxes.
Although the logistics of selling one property and buying another are virtually identical to any sale, the distinction between exchanging and selling and buying is ultimately what allows the taxpayer to qualify for deferred gain treatment. So essentially, sales are taxable and exchanges are not.
Basic exchange rules:
To the extent that either of these rules is not met, a tax liability will occur, although partial exchanges qualify for partial tax deferral.
The definition of like-kind has often been misinterpreted to mean the property acquired must be utilized in the same form as the exchange property (in other words, apartments for apartments, hotels for hotels, farms for farms, etc.). However, the true definition concentrates more on the intent than the use. Basically, there are currently two types of property that qualify as like-kind:
Property exchanged may either be real property or personal property. However, personal property may not be exchanged tax-free for real property, and vice versa. In many instances (e.g. an apartment building exchanged for a farm), an exchange may involve assets comprising both real and personal property. This type of exchange is common and requires a thorough analysis to ensure that more of one type of property is not being exchanged for the other.
There are, generally, no provisions within either the Internal Revenue Code or the Treasury Regulations that restrict the number of properties that can be involved in an exchange. Therefore, exchanging several properties into one replacement property or vice versa, selling one property and acquiring several, are perfectly acceptable strategies.
The 1031 Exchange process is quite complicated, and it is recommended that you speak to a Rea Representative for guidance or advice on the transaction(s) in question.
This article was originally published in Illuminations: Facts & Figures from people with a brighter way, a Rea & Associates enewsletter, June 28, 2006 issue.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.
