Why Does Section 1031 Exist?

Section #1031 of the US Tax Code has rapidly become a popular way for investors to shield themselves from immediate tax liability when they sell and buy investment property. While it once was a rather enigmatic section of the Code, with the passage of the 1990 Omnibus Budget Act, the process was clarified allowing a broader swath of everyday investors to take part in 1031 exchanges.

But what is the rationale behind allowing tax-deferral with a 1031 exchange? The #IRS logic is that when an investor reinvests their sale proceeds into another property (one that is “like-kind” to the property they sold), the economic gain is not actually realized. The investor’s investment still exists, it just changes form. Understanding that, the IRS believes it unfair to make the investor pay tax on a “paper” gain.

Of course, this doesn’t eliminate the tax obligation altogether. After all, the IRS isn’t known for their gift-giving generosity. Taxes are only deferred. Once the investor sells their investment property outright, tax becomes immediately due.

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.