Real Property Like-Kind Exchanges Under IRC Section 1031

IRC section 1031 like-kind exchanges

Imagine this simple scenario: real or personal property is held for productive use in a trade or a business, or as an investment, and is sold at a gain. Tax is generated at the time of sale, correct?

Well, as with many matters relating to taxes, Internal Revenue Code (“IRC”) Section 1031 does not make the answer quite so simple. Under Section 1031, the exchange of certain types of property may be deemed a “like-kind exchange” and defer the recognition of gains (capital or ordinary) due upon sale, and hence defer any taxes otherwise due.

This special IRC provision permits some kinds of exchanges to be made without the recognition of gain. In effect, there has simply been a transfer from one property to another. To illustrate this in the simplest form, take the example of a business that sells its warehouse to buy another warehouse. The business will not recognize tax on any gains made on the original property. When the business sells the original warehouse and purchases a new warehouse, the value used from the original warehouse to buy the new one has not changed. The only thing that has changed is where the value is being held.

As should be expected, there are specific criteria and facts that must be analyzed to determine whether a transaction qualifies for a deferral under Section 1031, such as:

  • Properly defining the meaning of “like-kind”
  • Important Dates – 45-day Identification Rule, and the 180-day Replacement Rule
  • Identification of a Qualified Intermediary
  • Determination if “boot” (unlike property or cash) has been received, and the proper tax treatment of such

A decision to replace real or personal property should always be determined based upon the business or personal economics of the decision-maker. However, while it is important to remember that an exchange under Section 1031 is that gain is deferred, but not eliminated, there is also a more pressing priority – planning. Planning for such transactions is of the utmost importance to ensure that all aspects of qualification for treatment under Section 1031 are properly identified.

We recommend consulting your tax advisor to inquire further with regard to Section 1031, as well as to ensure proper planning of transactions is conducted.

Lisa G. Pileggi can be reached at Email or 215.441.4600.

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