The Benefits of the IRS Section 1031 Exchange for Rental and Other Property
If you make a profit, you generally must pay gain tax at the time of a business, investment, or rental property sale. Thanks to the IRS, Section 1031 Exchange provides a deferral of gain taxes.
What is a 1031 Exchange? A simultaneous swap of one property for another is the simplest type of 1031 Exchange. This statue allows you to postpone paying tax on the gain by reinvesting the proceeds in similar property as part of a qualifying like-kind exchange. Unlike a taxpayer simply selling one property and using the proceeds to purchase another property (which is a taxable transaction), the Section 1031 Exchange can allow you to defer your taxes until the property is sold outright.
What property qualifies for a Like-Kind Exchange? Both properties must be held for use in trade, business or for investment. Any property used primarily for personal use, like a main, second or vacation home, does not qualify for like-kind exchange. The exchange can include like-kind property only or other types of exchanges which are outlined on the irs.gov website.
Who qualifies for the Section 1031 Exchange? Individuals (such as landlords), Corporations, partnerships (general or limited), limited liability companies, or trusts may qualify for Section 1031 Exchange.
What are the time frames?
You are allowed 45 days after the sale of the property to state in writing which properties you are deciding to purchase. After 45 days have passed, you have an additional 135 days to close on the property; allowing a maximum time frame of 180 days from the start to finish of the process.
When participating in this type of exchange it is imperative that you are knowledgeable about the eligible trade options, adhere to timeframes and fill out the proper documentation. This is where the expertise of tax professional Lakeesha Browne, CPA can help. Please contact her for questions on her website or book a consultation today.
Work cited:
“IRS Fact Sheet”, IRS.gov., 18 February. 2008, www.irs.gov/pub/irs-news/fs-08-18.pdf. Accessed 29 January 2023.
