What is a §1031 Tax Deferred Exchange?
IRC §1031 (a)(1) states that “no gain or loss shall be
recognized on the exchange of property held for productive use
in a trade or business or for investment if such property is
exchanged solely for property of like kind which is to be held
for productive use in a trade or business or for investment.”
A 1031 tax deferred exchange is the method by which a taxpayer
who owns property which has been held for investment or for use
in a trade or business can exchange the property for like kind
property which will be held for investment or in connection with
a trade or business and defer paying some or all of the federal
capital gains taxes. For investments held by individuals, the
deferral can continue through any number of exchanges until the
tax liability is extinguished by death.
What is “like kind” property?
In a 1031 exchange, “like kind” refers to the nature or
character rather than its grade or quality. Most real property
which is held for productive use in a trade or business or for
investment will qualify. Any real property will qualify for any
other real property. Raw land, office buildings, shopping
centers, retail stores, apartment buildings, farms, factories
and even a leasehold interest of 30 years or more will qualify
as like kind property. Personal property must be exchanged for
personal property; however, it must also be within the same
asset class. Who Should Consider an Exchange?
Any taxpayer who has recognizable gain in qualifying property on
which they will pay federal capital gains tax. An exchange
offers the opportunity for an investor to reinvest the federal
capital gains that would normally be paid to the IRS. If you are
considering selling property and reinvesting in like-kind
property, consult your tax advisor to determine if you should
complete this transaction through the use of a tax deferred
exchange.
What Property is Not Eligible for an Exchange?
Stocks, bonds, notes, interests in a partnership, shares in a
corporation, certificates of trust, choses in action, foreign
real property, primary residences, second homes, personal
vacation property, property held for resale and inventory are
examples of property not eligible for 1031 treatment. What is a Qualified Intermediary?
The taxpayer’s use of a Qualified Intermediary (“QI”) is a safe
harbor under the Regulations. An Exchange must include the sale
of relinquished property and the purchase of replacement
property using a qualified intermediary. The QI will prepare all
documents for the exchange, hold the exchange proceeds and
purchase the replacement property for the taxpayer. The IRS
allows for direct deeding to avoid duplicate transfer taxes. Who May Serve as a Qualified Intermediary?
The Regulations indicate that any party not disqualified under
the code may act as your intermediary. Disqualified parties
include the taxpayer or any lineal descendants of the taxpayer,
an agent of the taxpayer (realtor, attorney, tax advisor,
accountant, employee, etc. who represented the taxpayer within
the two years of the taxpayer disposing of the relinquished
property) or controlled business entities. Why Use Eastern Equity Exchange Corp. as a Qualified
Intermediary?
Eastern Equity Exchange Corp. is a Qualified Intermediary as
defined under IRC Section 1031 with substantial experience
handling 1031 tax deferred exchanges. We facilitate both real
and personal property exchanges nationally. Eastern Equity
Exchange Corp. carries a Fidelity Bond and Errors and Omissions
Insurance to protect your funds. Judy East has received the
Certified Exchange Specialist™ designation offered by the
Federation of Exchange Accommodators. She offers continuing
education for attorneys, accountants, real estate agents and
others in the industry. Eastern Equity Exchange Corp. provides
prompt, professional service because meeting your business needs
is our primary goal. What is
Boot?
Any property or other consideration not “like kind” in an
exchange. Boot is any cash received by the taxpayer and any debt
the taxpayer is relieved of may be recognized gain or “boot”.
The taxpayer may deposit additional cash for the acquisition of
replacement property to offset debt relief. However, debt
assumed on the replacement property will not offset cash
received from the relinquished property.
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