The Basics of 1031 Exchanges

1031 exchangeSection 1031 of the Internal Revenue Code (IRC) allows taxpayers to defer and possibly eliminate income or capital gains tax. This tax comes from the sale of a property the taxpayer holds for productive use in their trade, business, or investment when they buy other “like-kind” properties.

If you’re interested in learning more about Section 1031 or 1031 Exchange, contact intermediary firms offering 1031 exchange services or read through this basic information:

The Taxpayer Selling must also be the Taxpayer Buying

Whether they’re an individual, or a corporation, partnership, trust, or limited liability company, taxpayers selling and buying property can benefit from 1031 Exchanges.

The sale and purchase must involve the same taxpayer, however. For instance, a partnership cannot sell a property it’s holding in its own name, and then have an affiliated corporation buy the property. The partnership and the corporation are two separate taxpayers.

There is an exception for property held in a sole member disregarded limited liability company. Under this type of ownership, the property is treated as the property of the sole member for 1031 Exchange purposes. For instance, an individual taxpayer can sell property they’re holding in their own name, and buy property into a disregarded limited liability company. Under this situation, treated as the same taxpayer, the taxpayer is the sole member.

The Property Sold and Purchased must be “Like-Kind,” and must be Held for Use in Business or Invesment

For the purposes of 1031 Exchanges, real property held for business or investment can include a number of properties. These include properties held in fee, ground leases with remaining terms of 30 years or more, and undivided interests.

The taxpayer must hold the property sold or purchased under 1031 Exchanges for business or investment purposes for at least one year. They must also show that they’re using the property as a business or investment property on their tax return.

The rules for personal property are different than those for real property. First, only personal property that taxpayers can depreciate for tax purposes are qualified. Stocks, bonds, promissory notes, partnership interests, and other non-tangible assets can’t be the subject of 1031 Exchanges. Second, the Internal Revenue Service (IRS) interprets “like-kind” property stricter under personal property exchanges than real property exchanges.

There’s more basic information about Section 1031 and 1031 Exchanges. To learn more, research further or acquire 1031 exchange information and services.