1031 Tax Deferred Exchange

On this page we have attempted to give a brief overview of the 1031 tax deferred exchange installment. We recommend that you contact a qualified intermediary before entering into any tax deferred exchange.

Section 1031 is not a newly passed law. Congress passed the original law over 40 years ago. It was designed to encourage investment in business and investment properties by allowing tax payers to defer capital gains taxes if the property is exchanged for a property of “like kind.” The like-kind exchange under Section 1031 is tax-deferred, not tax-free. When the replacement property is ultimately sold (not as part of another exchange), the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax.

The Congress amended 1031 in 1989 in response to a taxpayer taking a number of years to identify the replacement property in the exchange. Thus the amended 1031 now requires that the replacement property be identified with 45 days of transfer of relenquished property, and subsequently purchased within 180 days of the transfer of relinquished property.

In 1991 the Internal Revenue Service passed regulations under the amended 1031 code describing different methods by which deferred exchanges would be permitted. They called these “Safe Harbors.” Reverse 1031 exchanges fall under ‘Safe Harbors.”

1031 is designed for “like kind” exchange of property held for business or investment purposes only. Thus both the relinquished property and replacenment property must be held for business or investment purposes. And again be of “like kind.” Now, generally all property is considered like kind to any other property. In a 1031 exchange the taxpayer's investment remains the same, only the form has changed. Thus it would be unfair to tax the exchange of paper.

Some Examples are:
• Unimproved land exchanged for improved land.
• Developed land for a piece of land with future improvements to be constructed making it developed.

Some Ecxlusions are:
• Real property outside the United States is not considered “like kind” to that inside the United States.
• Stock in trade or other property held primilary for sale.
• Certificates of trust or beneficial interest.
• Stocks, bonds, or notes.

Two Majors rules to 1031 are:

• The total purchase price of the replacement "like kind property" must be equal to, or greater than the total net sales price of the relinquished, real estate, property.
• All the equity received from the sale, of the relinquished real estate property, must be used to acquire the replacement, "like kind" property.

We hope this very abbreviated look into the world of 1031 exchanges was helpful. Please contact us to identify your replacement property, and for a list of qualified intermediaries to assist you with Your 1031 exchanges.