Section 1031 (like-kind exchanges) offer the opportunity to exchange one property for another, and defer (not currently pay tax on) the gain until the new property is later disposed of in a taxable transaction. In addition, there is no limit to the number of times a taxpayer can take advantage of Section 1031 exchanges. Brokers and parties to transactions can use Section 1031 exchanges to their creative advantage when a party would not be willing to sell in a taxable transaction, or when buyers are cash poor but have other business or investment property, or will have no capital gains tax currently due because of Section 1031.
Section 1031 exchanges have been referred to by a variety of names such as: Starker exchanges, like-kind exchanges, delayed exchanges, non-simultaneous exchanges, and tax deferred exchanges. They all basically refer to the same thing, i.e., that tax on any gain can be deferred through an exchange until a future taxable event occurs.
Tax considerations that the taxpayer should consider when determining whether to execute a Section 1031 exchange include the following:
(1) in an exchange, the basis of the new property is reduced by the amount of gain which has been deferred;
(2) Section 1031 “defers” tax on gain until a future point, but generally does not avoid it; and
(3) in some circumstances, it may be better to “Sell” the property, pay the tax, “reinvest” the proceeds, and get a higher basis with more depreciation as opposed to exchanging under Section 1031.
This legal article is intended as an introduction to this dynamic area of real estate brokerage practice. Individuals who are contemplating an exchange should first consult appropriate professionals who are experienced in the tax and financial aspects of Section 1031 exchanges.
The information contained herein is believed accurate. It is intended to provide general answers to general questions and is not intended as a substitute for individual legal advice. Advice in specific situations may differ depending upon a wide variety of factors. Therefore, readers with specific legal questions should seek the advice of an attorney.