1031 property exchanges

Section 1031 is defined under Internal Revenue Code.1031 property exchanges is tax deferred exchange, but not tax free exchange . If you complete a 1031 exchange i.e. selling of your property and investing the amount in the like- kind property for your trade or business, you can defer the capital gains taxes on the sale your existing property. To avoid the capital gin tax you have to hold your replacement property for entire life. Yours heirs can sell the property at the fair market value with no capital gains tax. The exchanged property must be either held for investment or used in trade or business . Hence your personal residence does not qualify for 1031 property exchanges treatment unless it was used in your business. The boot which is described as cash or gain for the property is sold excess of replacement of property, hence it attracts Federal Tax. Hence boot should not attracted.

QUAliFIED PROPRTY FOR 1031 EXCHANGE

The exchanged property must be like kind property. Almost any type of real estate whether improved or unimproved can be exchanged for other real estate. The following types of properties are considered like kind for 1031 property exchanges purpose.

  • A residential rental property and a commercial rental property
  • A shopping mall and an undeveloped piece of land
  • A condominium and a share of a cooperative
  • Permanent conservation easements in two different pieces of real estate
  • Water rights of unlimited duration and farmland.

    • It should be remembered the like-kind property means it is situated in 50 United States or the U.S.Virgin Islands. Foreign real estate is not considered like-kind property for the purposes of a 1031 property exchanges.

    DISQUAliFICATION OF 1031 EXCHANGES

    The property such as held for personal use, inventory, partnership interests and stocks and bonds. However vacation homes may qualify under certain circumstances.

    TYPES OF EXCHANGE OF PROPERTY

    There are different types of exchange of property under section 1031

  • Simultaneous Exchange: It is an exchange in which the closing of the relinquished property and the replacement property occur on the same day and there will be no interval of time between the two closings. This type of exchange is covered by the safe harbor regulations.
  • Delayed Exchange: It is an exchange where the replacement property is closed on at a later date than the closing of the relinquished property. In this case, the exchange is not simultaneous or on the same day. It is called as STRKER EXCHANGE where the Supreme Court mentioned. Thereafter Internal Revenue Code provided for such exchange providing the time i.e. 45 day clock and 180 day clock.
  • Reverse Exchange: It is an exchange in which the replacement property purchased and closed on before the relinquished property sold.
  • Improvement Exchange: It is an exchange in which a taxpayer desires to acquire a property and arrange for construction of improvements on the property before it is received as replacement property. The improvements are usually a building on an unimproved lot, enhancements etc.

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