1031 Exchange
Investment in Real Estate as a Method of Deferring Income Tax Liability
If a taxpayer exchanges an investment property solely for another investment property of a like-kind, no gain or loss is recognized under Internal Revenue Code Section 1031. Properties are of like-kind if they are of the same nature or character, even if they differ in grade or quality. Real properties generally are of like-kind, regardless of whether the properties are improved or unimproved. IRS Code Section 1031 has been in existence since 1928. The formula for the code is simple; the replacement property must be equal or greater in value and debt than the property being sold. The taxpayer does not have to buy a property at the same time he/she is selling. However, the law does set up some strict timing requirements. The taxpayer's income taxes are deferred until the period in which he/she decides to sell the property outright and pocket the sales proceeds without purchasing another property of a like-kind. Income taxes can be avoided by continuing to exchange properties and with proper estate planning passing the properties on to heirs.
For more information about 1031 exchanges, consult with a real estate attorney, financial advisor or tax planner.