Section 1031

Section 1031 – I.R.S. Defines Real Property

Dear friends and clients – the longstanding tax break we’re currently experiencing has contributed to the making of many fortunes. However, consider these two things about the Section 1031 exchange privilege:

  1. Democratic presidential candidate Joe Biden’s proposed tax plan would eliminate the provision.
  2. The IRS recently issued new regulations that define what constitutes real property to determine eligibility for Section 1031 like-kind exchanges. But those regulations won’t do you any good if your ability to make an exchange is eliminated, and you fail to get your exchange done before that happens. So, you might have to move fast to take advantage of the exchange break before a Biden tax plan could potentially take it away.

Do you own a business or investment property that has gone up in value? Would you like to acquire a new property?

If you sell the old property, you’ll have to pay tax on your profits. This is not a financially wise decision. Instead, you may benefit more from a tax-deferred Section 1031 transaction.

With a properly constructed Section 1031 transaction, you:

  1. Sell your old property,
  2. Buy the replacement property, and
  3. Pay no taxes.

Your first step is to engage an intermediary.

Second, you need to buy a replacement property of equal or greater value than the property you sell.

You may have noted that I left out the word “exchange” when introducing Section 1031. This was intentional because to exchange means to trade. In the Section 1031 exchanges I’m familiar with, it’s never a swap of properties. Instead, it’s a sale and purchase using the provision rules to defer the taxes.

The provision exchange rules are complex and include strict deadlines for identifying and acquiring the property involved. To do this right, you need a qualified intermediary, which can be a bank, a lawyer, or a qualified company.

In the past, the provision allowed both personal property and real property exchanges. The Tax Cuts and Jobs Act eliminated personal property exchanges, such as trading in your vehicle for a replacement.

But real property exchanges remain. They are accurate tax-saving machines. And the new I.R.S. regs make it clear that a Section 1031 transaction does not get in the way of cost segregation—a method used to speed up depreciation on real property.

Would you like to learn more about the guidelines for Section 1031 transaction? Contact us for more information – we are here to guide you! Let’s talk today.