What Is a Tax Free 1031 Exchange Property?
Internal Revenue Code 1031 allows an exchange of like-kind property without the need to pay taxes on the exchange and without the ability to claim a loss on the exchange. Internal Revenue Code 1031 applies specifically to business and investment property.
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Identification
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A 1031 exchange property is business or investment property involved in a like-kind exchange. Like-kind property is property a taxpayer may use in a similar manner as the property exchanged. Like-kind property must be of the same nature or character.
What Cannot Be 1031 Property
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According to Internal Revenue Code Section 1031(a)(2), like-kind property "does not apply to exchanges of inventory, stocks, bonds, notes, other securities or evidence of indebtedness, or certain other assets."
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Boot
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If a tax payer receives boot, he must record a gain to the extent of the boot received. Boot is money or non-like-kind property. Recognize no losses if boot is received.
Forms
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If claiming a like-kind exchange, the taxpayer must file IRS Form 8824. IRS Form 8824 calculates realized gain or loss, recognized gain and the new basis of the property in a like-kind exchange.
Other General Provisions
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Since transactions can often take place over a period of time, each side must identify which property is being exchanged, then taxpayers must complete the exchange in 180 days after the transfer takes place. Such occurrences as closing on the property, or filing the titles can take place after the actual exchange. If the exchange is finalized after 180 days, the exchange no longer falls under Section 1031, and the taxpayer will not benefit from tax preferences in Section 1031.
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References
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