1031 Exchange Rules & Regulations
A 1031 Exchange is an Internal Revenue Condition that allows for a tax-deferred exchange with like properties. These exchanges must occur within a designated period of time to qualify for the tax benefit. These exchanges are most commonly associated with real estate but can be done with other real property. There are specific regulations for individuals or businesses to follow in order receive a tax-deferral for the exchange of property avoiding high capital gain or other taxes.
Other People Are Reading
-
Loss or Gain
-
In a 1031 Exchange, there is an equal exchange with no loss or gain attributed to the exchange. These must be like-kind real properties. If as part of the exchange there is a gain of money or other benefit from it, the gain is recognized by the IRS and possibly taxed. If there is a loss associated to the exchange, the loss is not recognized. A property is considered like-kind regardless of whether it has been improved or not.
Business or Personal
-
A 1031 Exchange can be performed for either business or personal assets. It can also be done from a business to an individual or vice-versa. The exchange refers to the properties of the asset as being exchanged and not who is exchanging it.
-
Time Frame
-
The person or entity seeking to perform a 1031 Exchange has 45 days to complete the exchange. If like-property has not replaced the initial property, this is considered a sale followed by a buy and will be subject to taxes and not deferred in accord with the Internal Revenue Code Section 1031. This can be extremely tricky when it comes to real estate which can have contingencies that extend escrow.
Defining Like-Kind
-
Items eligible in 1031 Exchanges are real estate, boats, vehicles and other tangible assets including farm animals. To qualify for the tax-deferral, it is imperative that the person doing the exchange understand what is like-kind. A house cannot be exchanged for a boat. Nor can a male cow be exchanged for a female cow since they have different definable economic properties. While they must have the same properties, they can differ in quality or grade.
Real Estate
-
Real estate must have a specific classification to qualify for a 1031 Exchange. It must be for business or investment use. A property that is being exchanged from business use must be exchanged for either business use or investment use but cannot be exchanged for person use or general sale. So a rental property may be exchanged for land to be developed.
Items Not Eligible
-
Stocks, bonds, and other securities are not eligible for a 1031 Exchange. Inventory maintained in warehouses is not eligible either. Additionally, mortgages and other debts can not take any tax-deferred advantage in a 1031 Exchange and are not eligible items.
-
