In Part 1 of the blog series we briefly discussed how the IRS can partner with you to help preserve and build 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 estates. 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
Jeffrey W. Foster, CPA
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