“Under Section 1031 of the United States Internal Revenue Code (26 U.S.C. § 1031), the exchange of certain types of property may defer the recognition of capital gains or losses due upon sale, and hence defer any capital gains taxes otherwise due.” Internal Revenue Code Section 1031
Current tax law permits an investor in real estate to defer capital gains taxes on exchanging an investment property for another property of like kind that is also held for investment, so long as the taxpayer satisfies numerous requirements and consummates a purchase of replacement property within 180 days of the transfer of the relinquished property. In the 113th Congress, several tax reform proposals included repealing or severely limiting Section 1031. However, no legislation related to Section 1031 has been introduced in the 114th Congress (which began in January 2015).
- For a significant proportion of real estate market participants, like-kind exchanges (LKE) provide an important vehicle to dispose and acquire property.
- Like-kind exchanges are available to individuals, partnerships, corporations, limited liability companies, as well as trusts.
- The main requirement of a like-kind exchange is that the disposition of one property and acquisition of another property must be part of an integrated transaction, rather than two individual transactions.
- REALTORS® are active participants in like-kindexchanges as investors, brokers and agents, intermediaries and professional advisors.
- Sixty-three percent of REALTORS® participated in a like-kind exchange transaction during 2011-14.
- In 2014, REALTORS®’ average fair market value of all transactions was $7.0 million
- Like-kind exchanges accounted for 39 percent of total FMV, or $2.7 million per respondent.
- Ninety-six percent of REALTORS® indicated a decrease in real estate values in case of repeal of like-kind exchange provisions.
- Click HERE to read the full survey from 2015.
From the National Association of REALTORS(R)
5 Things to Know About 1031 Like-Kind Exchanges
- 1924, with the most recent significant modification in 2018. It is a very well-established provision.
- A 1031 like-kind exchange is not a tax “loophole,” but rather a deferral – the owner pays tax on the property when it is ultimately sold for cash, as opposed to when it is exchanged for another property.
- Any cash you receive as part of the deal – for example, if the property you receive is valued lower than the one you exchange it for and you receive cash for the difference – is taxed as partial sales proceeds (usually at the capital gains rate).
- 1031 exchanges are only allowed for investment or business property, but in some cases can be used for properties such as vacation homes, and for tenants in common real estate.
- Timing is important. A “replacement property” must be designated within 45 days of the sale of your property, and you must close the deal on the new property within six months (180 days) of designating it.
Though an effective tool, you’d be well advised to use professionals to facilitate the execution.
Click on this helpful Link for more details – http://irs.gov
There is a lot more information available about the 1031 Tax Survey and the 1031 Tax Exchange itself. Contact me today!! 319-331-0744!!