Irc 1031 Tax Free Exchange

Generally have to pay tax on the gain at the time of sale.

Irc 1031 tax free exchange.

A related party exchange occurs when the taxpayer does a 1031 exchange with a party or entity that is considered related to the taxpayer under the tax code. The term 1031 exchange is defined under section 1031 of the irs code. Generally if you make a like kind exchange you are not required to recognize a gain or loss under internal revenue code section 1031. Paragraph 2 d of section 1031 a of the internal revenue code of 1986 formerly i r c.

The term which gets its name from irs code section 1031 is. In other words irc 1031 allows an investor to defer paying capital gains taxes on transfer or sale of an investment property in consideration of a like kind property. Gain deferred in a like kind exchange under irc section 1031 is tax deferred but it is not tax free. Thanks to irc section 1031 a properly structured 1031 exchange allows an investor to sell a property to reinvest the proceeds in a new property and to defer all capital gain taxes.

1031 a taxpayer may defer recognition of capital gains and related federal income tax liability on the exchange of certain types of property a process known as a 1031 exchange in 1979 this treatment was expanded by the courts to include non simultaneous sale and purchase of real estate a process sometimes called a. A 1031 exchange means that if you exchange your property with a like kind property any gain on the value difference will not be charged to tax under capital gains. Under section 1031 of the united states internal revenue code 26 u s c. Irc section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like kind exchange.

We ll discuss like kind property in more detail in section four. There are a number of important steps to a properly structured 1031 exchange. Related party is defined in sections 267 b and 707 b of the internal revenue code. 1 to put it simply this strategy allows an investor to defer paying capital gains taxes on an investment property when it is sold as long another like kind property is purchased with the profit gained by the sale of the first property.

Section 1031 defers tax on swaps of like kind real estate done in a timely manner. No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely. The real estate purchased with the. 1954 as amended by subsection a shall not apply in the case of any exchange pursuant to a binding contract in effect on march 1 1984 and at all times thereafter before the exchange.