Think about Real Estate.
Anyone who is selling a business or investment property should consider the benefits of a 1031 Exchange also known as a like-kind exchange. Internal Revenue Code (IRC) Section 1031 allows an investor who sells a property and reinvests the proceeds in a new property to defer all capital gain taxes. IRC Section 1031(a)(1) states:

“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.”

To be eligible for a 1031 exchange the buyer basically must:
– Purchase property that will be held for investment or used in a trade or business;
– Purchase property of equal or greater value; and,
– Obtain the same or greater debt on the new property.

The Internal Revenue Service (IRS) does mandate that an investor:

(1) identify the new property within 45 days of the sale of the original property and close within 180 days;
(2) use a qualified intermediary (QI) to hold the proceeds of the original sale (a QI is a company that is in the full-time business of facilitating IRC Section 1031 Exchanges and is further defined under IRC Section 1031(k)-1(g)(4)); and,
(3) reinvest all of the equity from the sold property into the new property.

For example: if an investor buys an income property for $250,000 and later sells the property for $350,000, the investor has made $100,000 that would be taxed at the capital gains rate. If the investor reinvests the $350,000 in another income property this could qualify as a 1031 exchange and allow the payment of the taxes to be deferred.

In many instances 1031 exchanges are very useful in deferring an investor’s tax liability. The exchange should be contemplated before the sale of the initial property and structured to best benefit each investors unique concern. It is wise to consult an experienced attorney if you are considering a 1031 exchange.