Tag Archives: 1031 exchange real estate

Some Important Reminders About USC Section 1031

Businesses rely on investments and assets in order to survive, although there are times when some of these go so bad that it’s time to have them removed. However, rather than go through the trouble of liquidating them and buying a new one, savvy businessmen can simply swap their old assets with new ones, and pay little for the transaction. This is known as real estate exchange.

Section 1031 of the Internal Revenue Code deals with the “exchange of property held for productive use or investment”. While this description sounds pretty straightforward, this does give some limits to 1031; it can’t be invoked to swap one residential property for another, unless it’ll be used for investment (rather than living) purposes. The term “property”, however, is very broad and can include even small things like cars and paintings.

According to the Internal Revenue Service (IRS), up to three of these properties can be designated as replacement properties, provided that the buyer makes a transaction on at least one of them. In addition to that, taxes can still apply on exchanges that involve properties with existing debts and mortgages, like office spaces. This is especially true if, say, the old property has a greater mortgage than the new one because this will mean that the buyer only has to pay off a smaller mortgage after the exchange, which is considered by the IRS as “income”.


3 Must-Knows about 1031 Exchanges

Making sense of figures in a tax form can be confusing if one’s mind is not adept at number-crunching. For tax whizzes who handle such things that involve much more analysis like investments and properties, it will add up sometime. A tax expert can explain how a 1031 exchange works, for example, in a simple language: it is a method of disposal of property and acquisition of another one without the burden of a capital gains tax. 

Here are three other things a financial genius will tell you about 1031 exchanges. First, it deals with like-kind exchanges. This means, a personal property cannot be sold to buy business assets. Examples of qualified trades include, among others, land for an industrial building, or an office in exchange for a shopping center. 

Second, the barter of properties can be delayed. It is not frequent that a prospective investor will be able to find a land or structure he likes at first scouting. When this happens, a person should be hired to virtually hold the proceeds from the first purchase, and later on use the money to pay for a replacement asset preferred by the first party. 

Third, prospective replacement properties under 1031 exchanges can be multiple. The Internal Revenue Service says it can be as much as three, so long as one is closed within the prescribed period.