Whether it’s real estate or not, 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 Service (IRS) Code Section 1031.
If, as part of the 1031 tax 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.
Note: Section 1031 does not apply to exchanges of inventory, stocks, bonds, notes, other securities or evidence of indebtedness, or certain other assets.
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, farm and ranch 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 Versus Selling Property
Let’s assume a sale price of $250,000 with a real estate loan of $100,000, and the property was purchased for $150,000 a few years ago:
Example Only: Selling Your Bozeman Real Estate
|Available Investment Cash||$122,000|
|New Investment Purchasing Power (25% down)||$488,000|
Example Only: 1031 Real Estate Exchange
|Available Investment Cash||$100,000|
|New Investment Purchasing Power (25% down)||$600,000|
More 1031 Exchange Resources
- Publication, Sales and Other Dispositions of Assets
- Form 8824, Like-Kind Exchanges (PDF)
- Tax Tips – Real Estate
- Like-Kind Exchanges-Real Estate Tax Tips at the IRS website
- National Association of Realtors-Field Guide to 1031 Exchanges