Like-Kind Exchanges - Real Estate Tax
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What is a 1031 exchange?
A 1031 exchange makes it possible for investors to sell and buy property of
like kind while deferring tax consequences. This transaction is authorized by
section 1031 of the IRS code and offers investors a reliable strategy for the
protection of their real estate assets. A successful 1031 exchange allows the
investor to reinvest 100% of the equity from the sale of a property into the
purchase of a preferred replacement property without recognizing any gain. This
type of property sale and reinvestment can either be done through a simultaneous
or delayed 1031 exchange. In most cases a 1031 exchange is done as three-party
delayed exchange also known as a "Starker Exchange" in which an
intermediary ensures a reciprocal transfer of the properties and provides a
"safe harbor" against the actual receipt of exchange funds. It is
extremely important that this process be done correctly,
otherwise, a taxable event may occur.
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What are the advantages of a 1031 exchange?
1031 exchanges provide real estate owners with a range of opportunities to
meet personal investment objectives including increased leverage, improved cash
flow, diversification, reduction of management obligations, geographic
relocation and/or consolidation. The tax dollars saved by an exchange may be
maximized to increase an investor's overall net worth. Ultimately, the exchange
process allows investors to reorganize and improve their real estate portfolios
to best suit their unique interests and needs. Strategic Tax and Wealth Planning
can further maximize the value of current and future assets.
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Generally, if you exchange business or investment property
solely for business or investment property of a like kind, no gain
or loss is recognized under Internal
Revenue Code Section 1031. If, as part of the exchange, you
also receive other (not like-kind) property or money, gain is
recognized to the extent of the other property and money received,
but a loss is not recognized.
Section 1031 does not apply to exchanges of inventory, stocks,
bonds, notes, other securities or evidence of indebtedness, or
certain other assets.
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Like-Kind Property
Properties are of like kind if they are of the same nature or
character, even if they differ in grade or quality. Personal
properties of a like class are like-kind properties. However,
livestock of different sexes are not like-kind properties. Also,
personal property used predominantly in the United States and
personal property used predominantly outside the United States are
not like-kind properties.
Real properties generally are of like kind, regardless of
whether the properties are improved or unimproved. However, real
property in the United States and real property outside the United
States are not like-kind properties.
Additional Resources
IRS Publication
544, Sales and Other Dispositions of Assets
IRS Form 8824,
Like-Kind Exchanges
TIC
Tenant in Common Guide by
Rentlaw.com
Commercial
Real Estate Glossary
by Rentlaw.com
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Additional 1031 Exchange Resources
include:
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