Under Section 1031 of the United State Tax Code when property held for productive use in a trade or business or for investment is exchanged for the same kind of property, the capital gains can be deferred. This transaction is called an exchange because one property is being exchanged for another.
Taxes are allowed to be deferred because legislators reasoned that when a property owner has reinvested the proceeds from one sale into another property, no funds have been generated on which to levy taxes: The taxpayer's investment is still the same, only the form has changed.
As with many tax questions, claiming a 1031 exchange can be complicated, and you must properly comply with several requirements. Section 1031 requires that a qualified intermediary (QI) facilitate the property exchange. The QI cannot be the taxpayer or anyone the taxpayer has a business or family relationship with previous to the exchange. However, an attorney and/or law firm may qualify.
To ensure you are deferring taxes lawfully and not evading taxes, which is against the law, consult with an attorney at Painter & Associates. Our attorneys can help with the following issues with 1031 exchanges:
- Which types of property qualify for a “like-kind” exchange
- Which types of business can make the exchange
- If the purpose of the exchange is valid
- The time limits on how many days a property can be relinquished before the replacement property must be purchased
- What happens when you sell the relinquished property before buying the replacement property, and vice versa
- The kinds of exchanges that are allowed: simultaneous exchange; delayed exchange; reverse exchange; and personal property exchange
Again a 1031 Exchange defers the payment of taxes; it is not a tax-free transaction; however, there may be substantial tax advantages and estate planning advantages to using a 1031 exchange. Our attorneys can advise you on the tax consequences of exchanging property versus selling it and realizing capital gains immediately.