What Is A 1031 Exchange

The United States Internal Revenue Code, Section 1031 also recognized as 1031 exchanges delineates that the exchanges of certain kinds of properties or assets may suspend or defer the recognition of capital losses or capital gains payable upon sale, and consequently postpone any capital gains taxes, which would normally be due.

So how can you qualify for Section 1031 of the US Internal Revenue Code? You can only qualify for this opportunity if the properties exchanged will be made for productive and purposeful use in an investment, trade or business. You should note that properties such as bonds and stocks are considered as proscribed properties in Section 1031, though securitized assets are authorized for exchanges.

The exchange of properties will only be possible if the assets involved are “like-kind”, which means they should have the same or equal character or nature, despite the fact that they differ in quality. As a taxpayer, you may wonder if the equipments utilized inside the property are included in the total amount of the property for sale and if they will also be deferred upon exchanges. As stipulated by the Treasury regulation, a property that is exchanged with the larger equipment of value should not be more than 15% of the fair market worth of the larger property.

The exchange of properties will only be possible if the assets involved are “like-kind”, which means they should have the same or equal character or nature, despite the fact that they differ in quality. As a taxpayer, you may wonder if the equipments utilized inside the property are included in the total amount of the property for sale and if they will also be deferred upon exchanges. As stipulated by the Treasury regulation, a property that is exchanged with the larger equipment of value should not be more than 15% of the fair market worth of the larger property.

Most of the time, the sales of real property are the ones being granted under Section 1031. Some types of personal property can also qualify for exchanges. Disallowed transactions include exchanges of corporate stock shares in different companies, partnership interests’ exchanges of different partnerships and exchanges for different sexes in livestock.

To benefit most from 1031 exchanges, the replacement property that you will acquire should have at least matching or greater worth or value and all of the gains from the renounced asset must be utilized to obtain the replacement property. Keep in mind that it is prohibited for you to collect the proceeds of the sale of your old property.