Like-Kind Exchanges: Real Estate Tax Tips

Generally, if you exchange business or investment property solely for business or investment property of a like-kind, no gain or loss is recognized under Internal Revenue Code Section 1031. If, as part of the exchange, you also receive other (not like-kind) property or money, gain is recognized to the extent of the other property and money received, but a loss is not recognized.

Section 1031 does not apply to exchanges of inventory, stocks, bonds, notes, other securities or evidence of indebtedness, or certain other assets.

Like-Kind Property

Properties are of like-kind, if they are of the same nature or character, even if they differ in grade or quality. Personal properties of a like class are like-kind properties. However, livestock of different sexes are not like-kind properties. Also, personal property used predominantly in the United States and personal property used predominantly outside the United States are not like-kind properties.

Real properties generally are of like-kind, regardless of whether the properties are improved or unimproved. However, real property in the United States and real property outside the United States are not like-kind properties.

How can a 1031 help me?

A properly structured 1031 property exchange provides owners and investors with the opportunity to defer federal and state taxes on gains from the sale of their property.

Why Exchange?

Business owners and Investors buy property to make a profit. Decisions are carefully made to make as much profit as possible. Once the profit is made, the typical investor sells their property, pays their taxes and reinvests in other assets. The vast majority of investors seldom use of one of the most valuable techniques for increasing and preserving their wealth once it is made: The 1031 Exchange. A Section 1031 exchange allows you to postpone or potentially eliminate income taxes on the sale of qualifying properties.

By deferring your income taxes, you have More Money available to purchase another property (ies).

You can Diversify the Type of Assets your own

You can keep your Assets Fully Invested and Appreciating.

You can improve your Cash Flow by switching properties.

You can improve your Opportunities for Appreciation.

You can select Properties that are easier to Sell.

You can select Properties that require Less Management.

You can select Properties that are in a Better Location.

You can accomplish Your Wealth Creation or Retirement Goals.

All without incurring Income Taxes!

For those who believe that the current capital gains rates are at the lowest point now, it can be easily demonstrated mathematically that it is almost always a mistake to pay taxes earlier than later.

The ability of a client to defer taxes and permit their assets to appreciate almost always results in greater wealth for the client who defers their taxes now.

What can be Exchanged?

Did you know 1031 exchanges can be used to defer taxes on many things other than just land and real estate? Here are some examples:

Aircraft
Business Assets
Fleet Vehicles
Livestock
Licenses
Patents
Franchises
Autos
Artwork
Other collectibles

While a Personal Property Exchange is generally more complicated, it can be very rewarding for the Business Owner who chooses to treat it as a Section 1031 Exchange. Owners of Personal Property who reinvest through a 1031 exchange, can avoid the much higher income tax rates  on the sale of personal property. The rate of tax on personal property is generally double the rate for real estate. Let our experienced staff guide you through a personal property exchange.

In order for personal property to meet the like-kind requirement, the replacement property must be of the same general asset class or of the same product class, or if the assets are deemed to be of "like-kind" under the general principles. See IRS Reg. Section1.1031 (a)-2(c(1) such as intangible personal property, collectibles, and artwork.

Before starting a personal property exchange, please call our tax attorneys to discuss your situation and to find out how it might be structured for the least taxing alternative.

Did You Know?

There are some things that Section 1031 doesn't apply to.

Section 1031 does not apply to exchanges of inventory, stocks, bonds, notes, other securities or evidence of indebtedness, or certain other assets.

There are alot of different aspects to this tax section, including Compare Intermediaries . When it comes to Compare Intermediaries , there is alot to know when Compare Intermediaries involves Section Ten Thirty One and Real Estate.

An exchange or Like kind exchange is defined by section 1031 of the Internal Revenue Code. This code specifies that if an asset , usually some form of real estate such as land or a building, is sold and the proceeds of the sale are then reinvested in a like kind of an asset then no gain or loss is recognized, allowing the deferment of capital gains taxes.

Other aspects of Compare Intermediaries and this tax exchange filing include the Following:

• Identifying the Replacement Property
  
• Tax Advantages
  
• Business Property

In order to qualify certain rules must be followed. Broadly these rules are as follows :

• Both the relinquished property and the replacement property must be held either for investment or for productive use in a trade or business. A personal residence cannot be exchanged.
  
• The asset must be of like kind. Real property must be exchanged for real property. Personal property must be exchanged for personal property.
  
• The proceeds of the sale must be invested in a like kind asset within 180 (property must be identified within 45 days) days of the sale.