1031 Exchanges: When The Law Allows You To Defer The Net Capital Gains From The Sale Of Investment For A Like-kind Property
What A 1031 Exchange Is
In 1966 George Harrison wrote about how the tax man will tax the street if you drive a car, tax your seat if you try and sit, tax the heat if it gets too cold and tax your feet if you take a walk on the Revolver album. Here in the United States, the IRS may be a bit more forgiving, at least in some circumstances. In order to benefit from the more forgiving tax laws in the U.S., the IRS requires you to disclose all income first and then declare whether or not it is taxable or non-taxable. One of the more lucrative grounds for non-taxable gain is through an exchange recognized under 26 U.S.C. § 1031, commonly called a “like-kind” exchange or a Starker exchange or even, simply enough, a “deferred exchange”. To be sure, you are not avoiding the taxes that you or your company has to pay. Instead you are, more correctly, deferring the taxable event. The idea of like-kind exchanges has existed in the law for almost one hundred years. Congress created the like-kind exchanges law in 1921. In 1924 Congress amended the statute to create what is, in many significant regards, the current like-kind exchange statute.
Requirements To Benefit From A 1031 Exchange
Within the parameters of the 1031 exchange, when you sell a property, you can purchase the new property of a like kind within 180 days. The properties cannot be held for personal use, but must be for business, trade or investment purposes. Professional art collectors can even qualify and have increasingly looked to 1031 exchanges. Next, the second property to the “swap” must be identified within 45 days from the date of the sale of the first property. The identification must be in writing, signed and delivered to a party to the transaction. In many circumstances a qualified intermediary person is involved and accepts this identification. The person or entity benefiting from the 1031 cannot take control of any cash or monies before the exchange is complete. As noted, a qualified intermediary person often is involved in the transaction to insure proper adherence to the law. Gains may be realized at the end of the transaction and still qualify as a 1031 exchange. Those gains, however, are taxable.
Other issues that must be considered is how the basis in the new property is calculated. Remember, gains are deferred, not avoided. As such, the basis in the new property is the same as in the old property. In addition, all 1031 exchanges must be reported to the IRS in the year in which the exchange happened. Do not wait until you sell the second property and obtain any gains to report the 1031 exchange to the IRS.
If you, your business or partners are considering transactions that may involve the sale and purchase of investment properties, you need a wise attorney with experience in the local market to provide proper legal counsel. The lawyers of the Charlip Law Group, L.C. have served local business leaders for over 30 years, by helping to minimize exposure to risk and maximize profit. Our experience is truly global in scope. Contact our office in Miami-Dade County via phone at (305) 354-9313 or (800) 773-1955 to setup an appointment.