1031 Tax Exchange

What is a Tax Deferred Exchange?

A tax-deferred exchange represents a strategic method for selling a qualifying property and the subsequent acquisition of another qualifying property within a defined time frame.

The process of divesting of one property and acquiring another within a 1031 exchange, are similar to any standard sale and purchase scenario. An exchange is different because the entire transaction is memorialized as an exchange and not a sale. And it is this distinction between exchanging and not simply selling and buying, which allows the taxpayer to qualify for a tax deferred gain treatment. i.e.: sales are taxable and exchanges are not.

Internal Revenue Code, Section 1031 Because exchanging represents an IRS recognized approach to the deferral of capital gain taxes, it is important to appreciate the components and intent underlying such a tax deferred or tax free transaction. It is within Section 1031 of the Internal Revenue Code that we find the core essentials necessary for a successful exchange. Additionally, it is within the Like-Kind Exchange Regulations, previously issued by The Department of the Treasury, that we find the specific interpretation of the IRS and the generally accepted standards and rules for completing a qualifying transaction. It is important to note that the Regulations are not the law. They simply reflect the interpretation of the law (Section 1031) by the Internal Revenue Service.

Why Exchange? Any property owner or investor who expects to acquire replacement property subsequent to the sale of his existing property should consider an exchange. To do otherwise would necessitate the payment of capital gain taxes in amounts which can exceed 20%-30%, depending on the appropriate combined federal and state tax rates. In other words, when purchasing replacement property without the benefit of an exchange, your buying power is dramatically reduced and represents only 70%-80% of what it did previously.