Tax Deferred Exchanges

Generally, when property is sold or exchanged, any gain or loss from that transaction must be recognized. This recognition of loss or gain often results in tax being imposed. However, there are certain situations when any tax imposed can be deferred to a later date. Most often, the tax will be imposed at a later date when the property is sold or otherwise disposed of in a taxable transaction.

The procedure outlined in Section 1031 of the Internal Revenue Code is one example of a tax-deferred exchange. A section 1031 exchange can be a significant tax-planning tool when the rules and regulations established in the code are followed.

What is 1031 Exchange?

Section 1031 exchanges are also referred to as tax-deferred exchanges, non-recognition exchanges, or like-kind exchanges.

1031 exchanges are called like-kind exchanges because there must be an exchange of property that had been held for investment or business purposes for property that will be used for investment or business purposes. Many people mistakenly believe that a like-kind exchange requires the properties be identical to each other. This is not the case, as a farm can be exchanged for a store or vice versa. The physical attributes of the property are not important; section 1031 of the code requires the properties that are exchanged to be real property which was and will be used for investment and/or trade.

Types of 1031 Exchanges

1031 exchanges can be structured in a number of ways including simultaneous exchanges and non-simultaneous exchanges.

Simultaneous exchanges occur when two property owners exchange qualifying properties at the same time. These types of exchanges are less common because it is difficult to find two owners that are interested in completing a 1031 exchange within the same timeframe and whose properties meet the requirements for a section 1031 exchange.

Non-simultaneous exchanges are more common and involve the use of a qualified intermediary, because the sale of the relinquished property and the acquisition of the replacement property will occur at different times. Section 1031 exchanges can be complex transactions and often involve multiple parties and properties, making it difficult to ensure that all the technical requirements of the section 1031 of the code are met. One little misstep can result in tax being imposed instead of deferred. Call (580) 234-6600 to discuss how to avoid missteps in a 1031 exchange.  

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