What is an IRC §1031 Tax Deferred Exchange
An IRC §1031 tax deferred exchange allows owners of real or personal property to defer the recognition of a capital gains tax they would have recognized when they sold their property.
Tax deferred exchanges are not new – they have been available in one form or another since 1921, and in its current format since 1986.
Exchanging allows you to reinvest money into new business or investment properties that you would otherwise have had to pay to the government.
What types of property may be exchanged?
Exchanges can involve real property or personal property such as trucks, aircraft, artwork, machinery or franchise rights.
Property to be exchanged must be held for business or investment purposes and not primarily for resale purposes or personal use.
The properties that are exchanged must be of “like kind” to each other. For real estate exchanges, the properties to be exchanged do not have to be the same type. As long as they are both held for business or investment purposes they are considered like kind. Personal property like kind rules are generally more restrictive.
How does an exchange work?
An exchange is basically a sale just like any other sale and a purchase just like any other purchase; however, you must work with a qualified intermediary before you start your exchange.
A qualified intermediary, also known as a QI, will prepare the paperwork necessary to structure the transaction as an exchange and also act as the independent third party to hold the exchange proceeds.
In a forward exchange you have 45 days from your sale to identify new properties to purchase, and 180 days to make the actual purchase.
Exchanges involving improvements to property and purchases before a sale are also possible.