IRC 1031

 
 

According to IRC 1031 of the United States Internal Revenue Code (26 U.S.C. § 1031), a taxpayer may delay realization of capital gains and related federal income tax liability on the exchange of specific types of property, a rule identified as a 1031 exchange. In 1979, this method was extended by the courts to constitute non-simultaneous purchase and sale of real estate, a process also referred to as Starker exchange.

GET PROPERTY LIST
 

Eligibility Criteria

To be eligible for IRC 1031, the exchanged properties must be held for efficient use in a business or trade, or for investment. Before 2018, other properties, bonds, and stocks were listed as expressly barred by Section 1031 of the Internal Revenue Code, however securitized properties were permitted. At present only real property is allowed under IRC 1031. The properties swapped must be of “like kind,” i.e., of the same character or nature, even if they vary in quality or grade. Under the pre-2018 provisions personal properties of a similar class were like-kind properties.

 

What is a Like-Kind property?

 

Real properties generally are of like kind, indifferent of whether the properties are unimproved or improved. However, a real property located in the United States and a real property located outside the United States would not be considered like-kind properties. Ideally, “like kind” in terms of real estate, indicates any property that is listed real estate in any of the fifty U.S. states or Washington, D.C., and in few cases, the U.S. Virgin Islands.

 

Qualified Intermediary

 

A Qualified Intermediary is needed to facilitate the transaction, by retaining all the gains of a sale, and then disbursing those gains at the closing, or sometimes for fees linked with acquiring the new property.

 

What is Boot/Gain?

 

Cash to adjust a transaction cannot be deferred under IRC 1031 because money is not of like kind. This cash is referred to as “boot” and the gain, to the degree of the receipt of this cash, taxed at a standard capital gains rate.

 

Starker Exchange

 

Initially, 1031 cases required to be concurrent transfers of ownership. But after the rendering of the verdict in Starker v. the United States, a contract to exchange properties in the future is identical to a simultaneous transfer. This case developed the concept of the Starker exchange. Starker Exchange paved the way for the origin of the rules for the election of a delayed 1031. To elect the 1031 recognition, the property needs to be identified by the taxpayer before closing. Investors get 45 days to identify the replacement property and 180 days of closing to acquire the replacement property.

 

Dealers

 

Taxpayers who own real estate as inventory, or who buy real estate for resale, are considered “dealers.” These properties are ineligible for Section 1031 exchange. However, if a taxpayer is an investor and a dealer, he or she can utilize Section 1031 on qualifying properties. Properties used for personal purposes are not eligible for 1031 exchange.

 

Section 1031 Like-Kind Exchanges


Section 1031(a) of the Internal Revenue Code (26 U.S.C. § 1031) dictates the recognition rules for realized gains (or losses) that emerge as a result of an exchange of like-kind property kept for engaging use in investment, business or trade. It asserts that none of the realized gain or loss will be recognized at the time of the exchange. It also affirms that the property to be exchanged must be identified within 45 days and received within 180 days.

 

1031(b) states when like-kind property and boot can be accepted. The gain is recognized to the extent of boot received.

 

1031(c) comprises cases similar to those in 1031(b), besides when the transaction ends in a loss. The loss is not considered at the time of the operation but needs to be carried forward in the manner of a higher basis on the property acquired.

 

1031(d) defines the basic calculation for property acquired during a like-kind exchange. It declares that the basis of the new property is similar to the basis of the property given up, deducting any money taken by the taxpayer, plus any gain (or minus any loss) recognized on the transaction. If the trade falls under 1031(b) or (c), the basis shall be allotted between the properties received (other than money), and for purposes of allocation, there shall be assigned to such other property, an amount similar to its Fair Market Value at the date of the exchange.

 

1031(e) states that livestock of different sexes do not qualify for a like-kind exchange. 1031(h)(1) dictates that real property located outside the United States and real property within the United States are not to be considered like kind.

 

1031 Exchange enables your money to churn the maximum profit for you. However, the exchange process is extremely complex in nature and it would be wise to seek guidance from expert professionals. We have extensive experience in handling highly profitable exchanges for our varied client base.

 

For consultation and assistance regarding 1031 exchange call – 888-993-2835 or email us at info@1031xchange.com

 

“Our tax-deferred 1031 exchange programs can save millions in taxes, increase investor equity, and compound annual cash flow distributions and returns”