10 Things To Know About 1031 Exchanges

Some investors have been wise to the tax benefits of a 1031 exchange for years. Others are new to the game and may wonder what all the fuss is about. They may hear the phrase “let’s 1031 that” bandied about by realtors, attorneys or other investors, but may not be clear on what this process involves.

Quite simply, a 1031 exchange allows an investor to swap one business or investment asset for another. Under normal circumstances, the sale of these assets would incur tax liability for any capital gains. However, if you meet the requirements of IRS tax code, section 1031 (hence the name), then you can defer any immediate capital gains tax.

It is important to note that a 1031 exchange is not a tax-avoidance scheme. Eventually, when you sell your business or investment asset and don’t replace it with another “like kind” property, capital gains taxes will be due.

There are many nuances to a 1031 exchange, which is why it is always wise to seek out guidance from a professional experienced with such transactions. Still, if you are curious about the basics, here are a few things you should understand before trying a 1031 yourself. The rest of the top 10 will follow in future blogs.

Not For Personal Use

While it may be tempting to consider trading up your primary residence and avoiding capital gains liability, a 1031 is only available for property held for business or investment use.

There Are Some Exceptions To The Personal Use Prohibition

Like most things in the IRS code, there are exceptions to the rule. While generally, personal residences don’t qualify, you may be able to successfully exchange personal property such as your interest in a Tenancy-In-Common or a piece of artwork.

Exchanged Property Must Be “Like-Kind”

This is an area that sometimes confuses new investors. The term “like-kind” doesn’t mean “exactly the same” but merely that the exchanged properties be similar in use and scope. While the IRS rules are liberal, there are many pitfalls for the unwary.

To find out how we can help you find and close on your next 1031 exchange property or to learn more about the exchange process and our qualified intermediary services, please visit our website.