What is a 1031 Like-Kind Exchange?
A 1031 like-kind exchange is a tax-deferred exchange that gets its name from the United States Internal Revenue Code, Section 1031. This is an exchange in which a person subject to United States taxes can sell property or other assets and replace it with a like-kind asset. With this type of exchange, capital gains taxes can be deferred. However, there are rules that must be followed concerning the deferment. Usually, when a person sells an asset or investment, he is taxed on the sale at the time of sale. With a 1031 like-kind exchange, however, things are handled a bit differently. If the money from a sale is reinvested into a similar property or asset, the person may be able to avoid paying taxes on the sale of the asset or property for years. Additionally, the exchange only has to include assets that are similar; they don’t have to be exactly alike. For example, a person may have a like-kind exchange situation if he sells an office building and reinvests in an apartment building. Wit
The Tax-Deferred Exchange, as defined in Section 1031 of the Internal Revenue Code of 1986, as amended, offers real estate investors one of the last, great investment opportunities to build wealth and save taxes. By completing a like-kind exchange, the investor (Exchange Party) can dispose of investment property, use all of the equity to acquire replacement investment property, defer the capital gain tax that would ordinarily be paid, and leverage all of the equity into the Replacement Property.
For those not familiar with the 1031 Exchanges, it is a method to exchange business-use property or investment (usually rental) property for one of equal or greater value, deferring any capital gain taxes until the final property is sold and no more exchanges are done. This is NOT for use in primary residences. Trading up with no immediate tax bill (it comes due eventually) is very attractive for many investors. For example, the most common type of 1031 property in New Bern is single family homes or condos bought as rental property, then traded up for one or more after the equity matures. BOB’S TIP: You should always discuss your personal situation with your accountant or financial advisor to see if a particular investment is right for you. Officially, a 1031 tax-deferred exchange is “a method by which a property owner trades one or more relinquished properties for one or more replacement properties of “like-kind”, while deferring the payment of federal income taxes and some state taxe
All 1031 exchanges should be for like-kind property. There are 2 categories of like-kind exchanges: 1) Real property exchanges 2) Personal property exchanges Generally no gain or loss is recognized if you exchange property held for use in your trade or business or for investment for new business or investment property that is like-kind. However, if as part of the exchange transaction, you also receive non-like-kind property (“Boot”) such as cash, services or differing property – gain must be recognized to the extent of this non-like-kind property received. Section 1031 does not apply to exchanges of inventory, stocks, bonds, notes, other securities or evidence of indebtedness. Nor does Section 1031 apply to “personal use property” (i.e. second homes and family cars) used primarily for personal use rather than for use in your trade or business or for investment. Real Property Exchanges All U.S. real-properties (brick/mortar and land) are generally like-kind, regardless of whether the pr
