1031 Property Exchanges

What Is A 1031 Property Exchange

A 1031 exchange allows purchases of real estate for investment purposes to defer federal capital gains on the exchange of like for like properties (refer to section 1031 of the United States Inland Revenue Code for more information). Please note that you cannot sell a property and at a later time purchase a property and expect this rule to apply, it must be an exchange. There are 4 types of 1031 exchange that can be performed.

What Properties Are Valid For 1031 Exchange

The code states that properties must be like for like. Properties are usually deemed to be like for like even if the condition of the 2 properties are in different states of repair. 1031 cannot be used to exchange properties located outside of the United States. The following properties are also excluded, property used as your personal residence, land under development, property purchased for resale, fix/flip properties, inventory property, corporation common stock, bonds, notes and partnership interests.

Tax Liability

The tax basis for the new property is the purchase price less the capital gains from the old property. Thus if an exchange is performed and at a later time that property is sold then you are liable for tax on the combined gain of the 2 properties.

If you purchase a property that is cheaper than the property sold then any gain received is taxable. Obviously the way to get round this is to always exchange for more expensive properties.

Names On The Title Must Be The Same

The property being purchased must be in the same names (the same names must be on the title) as the one that was sold. For example, if Fred and Mary purchased a property and then performed a 1031 exchange for a another property then both Fred and Mary must be on the title of the new property. Note you can still exchange a 100% interest property to one that contains several owners. You can also exchange 2 or more properties for a single property and vice versa.

We advise you to consult a real estate tax specialist before undertaking any real estate transaction based on a 1031 exchange.

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