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”.