1031 Tax Exchanges

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 Properties

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.

Benefits of Exchanging vs Selling

Let’s assume a sale Price of $250,000.00 with a loan of $100,000.00, and the property was purchased for $150,000.00 a few years ago.

Selling

Sale Profit $150,000
Tax Payable $28,000
Available Investment Cash $122,000
New Investment Purchasing Power (25% down) $488,000

1031 Exchange

Sale Profit $150,000
Tax Payable NONE
Available Investment Cash $100,000
New Investment Purchasing Power (25% down) $600,000

 


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