- The Garabedian Group Inc. CPAS
1031 Exchange— Partnering with the IRS
Updated: Jun 20, 2022
Do you have real estate you wish to sell? Are you concerned about Uncle Sam knocking on your door wanting to collect a tax bill after you sell your property?
You are not alone, many people are afraid of the IRS, but don’t worry you do not have to! There is a special section in the tax code that basically allows the IRS to partner with you regarding your tax bill. This special code section is IRC Section 1031.
In a nutshell, if you own investment real estate (commercial real estate, rental property, farmland, etc.) the IRS will allow you to defer that gain if you acquire “like-kind” property within a specified time period. The keyword here is deferred, not tax-free.
If done properly, a 1031 exchange is a powerful tool in preserving and building wealth! In subsequent parts of this blog series, we will discuss the appropriate process needed to accomplish a 1031 exchange so the IRS can partner with you in building your wealth!
As you know a dollar today is worth more than a dollar tomorrow. The IRC Section 1031 allows you to defer your taxable gain to a later day. Meaning more of your principal on your investment continues to compound!
In order to effectuate this powerful tool, the taxpayer must first make sure the real estate can qualify as "like-kind."
Per the IRS:
"Both the relinquished property you sell and the replacement property you buy must meet certain requirements. Both properties must be in use for trade, business, or investment. Property used primarily for personal use, like a primary residence or a second home or vacation home, does not qualify for like-kind exchange treatment."
"Both properties must be similar enough to qualify as like-kind. Like-kind property is a property of the same nature, character, or class. Quality or grade does not matter because most real estate will be like-kind to other real estate. For example, real property that is improved with a residential rental house is like-kind to vacant land."
Now that you have an idea if your property may qualify for like-kind treatment the next step is to understand the different structures of a like-kind exchange. The simplest type of like-kind exchange is a simultaneous swap of one property for another. There are two other options the tax player can explore but are a little more complex in nature. One is a deferred exchange while the other is a reverse exchange. In the next segment of this blog series, we will discuss both deferred exchanges and reverse exchanges so that you can preserve more of your wealth!
For more information on Like-Kind Exchange visit: http://bit.ly/2f37nbL