According to the Internal Revenue Code, Title 26, Section 1031, No gain or loss shall be recognized on the property exchange held for productive use in some trade, business or investment, if this exchange is solely for some like kind property which is to be held either for productive use in a trade, business or for investment. Here, the like kind property is addressed to some other real estate, which does not have to be a land-for-land or office-for-office exchange.
Cited as the most powerful wealth building tool available to taxpayers, the 1031 Exchange has been a major part of the success strategy of innumerable real estate agents and financial wizards. It is not only a wise tax and an investment strategy, but an estate planning tool, which enables an investor to continue deferring capital gains on the investment property until death.
Now, what kind of a property qualifies for a 1031 Exchange? Well, in order to make the best use of this section, here is an overview of different properties, It can be a real estate property held for business use or investment. You can’t use your personal property or a fix-and-flip property under this as it comes under the category of property being held for sale. Even your vacation or second homes, which are not held as rentals, does not qualify for this 1031 exchange. However, there can be procedures to make them qualified and one must consult a tax expert for this.
Here is the list of some real estate swaps that fits well in the requirement of a 1031 Exchange for a like-kind property:
1. It can be an office in exchange for a shopping center
2. A land for an industrial building
3. A shopping center for a land
4. Exchange of an industrial building for an apartment building
Today, you can undergo a range of exchanges, but make sure you do it under strict time constraints only, otherwise 1031 Exchange will not be allowed and tax consequences will be imposed.
One more interesting thing to note over here is that, this Exchange is not applicable to the following things:
1. Stock on sale or any other property for resale
2. Interests in a partnership
3. Stocks, bonds or notes
4. Certificates of trust or other securities or evidences of interest or indebtedness
Hence, if your real estate sale or subsequent purchase qualifies a 1031 Exchange and you also meet the requirements of time frames, then you are free to use the government’s money for growing your holdings. Just hire a professional today and get things done in the right way.