1031 Property Exchange Guidelines
As per Section 1031 of IRS, the exchange of like-kind property may delay the recognition of capital gains or loss due upon sale, and hence defer any capital gains taxes due otherwise.
To be eligible for Section 1031 of the Internal Revenue Code, the properties exchanged must be kept for productive use in a business, trade, or investment. Bonds, stocks, and other properties are listed as ineligible, and if used, the exchange will be disqualified. The properties exchanged needs to be “like-kind” in nature. Like-kind means the properties may differ in quality or grade, but they should be of the same nature or character. Personal properties of the same class are like-kind properties. However, geo-locations matter too. Personal property located in the United States and personal property situated elsewhere are not like-kind properties.
Real properties usually are of like-kind, irrespective of whether the properties are improved or not. However, real property within the United States and real property outside of the United States would not be like-kind properties. Generally, “like-kind” in terms of real estate, implies any property that is listed real estate in any of the 50 US states, and a few cases, the US Virgin Islands.
Who are Dealers?
Taxpayers who purchase for re-sell or hold real estate as inventory are considered “dealers.” Such properties are not fit for Section 1031 treatment. However, if the taxpayer is a dealer and also an investor, he/she can appropriate Section 1031 exchange on qualifying properties. Property used for personal use is not eligible for Section 1031 exchange.
1031 Property Exchange Explained
Taxpayers often wonder if items such as equipment used on a property are added in the lump-sum sale of a property and if or not they can be deferred. As per guidelines, property that is transferred together with a larger item of value that doesn’t exceed 15% of the fair market value of the larger property doesn’t need to be identified within the ideal 45 day identification period but still needs to be exchanged for like-kind property to defer the gain.
Cash to balance a transaction cannot be deferred under 1031 exchange because it is not of like kind. This cash is termed “boot” and is taxed as per regular capital gains rate.
If liability assumed by the buyer exceeds those of the taxpayer, the realized gains of the seller will not only be realized but recognized also. If however, the seller assumes a higher liability than the buyer, the realized loss will not offset any realized and recognized gain of receiving boot such as cash or any other personal property considered boot.
A taxpayer needs to identify the property for exchange before closing – the replacement property must be identified within 45 days of closing, and acquired within 180 days of closing. A Qualified Intermediary should also be used to help the transaction, by retaining all the profits from the sale, and then disbursing those gains at the closing, or sometimes for fees associated with acquiring the new property.
1031 Property Exchange Listings
When it comes to 1031 exchanges, there are numerous legal factors to consider which is why it’s advisable to work with a real estate firm like 1031 Property. If you are searching for 1031 Property Exchange Listings for sale, call 1031 property at (888) 395-0046. We will work with you to find a suitable property for your 1031 Exchange.