Investments + Services
Irs Code §1031
Internal Revenue Service Code Section 1031 provides that real estate or property held for investment or used in a business can be exchanged for “like-kind” property that will also be held for investment or used in a business.
Through this type of exchange an investor may defer federal, and in most cases state capital gain tax liabilities that would ordinarily be paid.
An investor’s capital gain and depreciation recapture income tax liabilities may be deferred indefinitely as long as the investor continues to exchange into like-kind replacement property through a series of Section 1031 like-kind exchanges. In addition at the time of a property owner’s death his or her heirs can inherit the property at a stepped-up basis and therefore the deferred federal and state taxes could potentially to be eliminated.
The deferral of income taxes allows a Section 1031 exchanger to reinvest 100% of the cash proceeds and debt into the replacement property. This may provide an investor with the ability to increase the overall value of his or her business property portfolio by trading up in value, improving cash flow or improving capital appreciation opportunities.
Qualifying Property for Section 1031 Exchange Treatment:
Vacation homes may qualify as investment property if personal use is minimal and the home is also rented. A taxpayer who uses a vacation home more than incidentally during the taxable year of the exchange is more than likely not holding it for investment purposes pursuant to Section 1031.
Split use property that is partially occupied by the investor as a primary residence and partially treated as rental, investment or business use property can qualify for split use treatment under IRS code. The portion of the property that is occupied by the investor may qualify for capital gain treatment as a primary residence, while the portion held for rental investment or business property can qualify under Section 1031.
Non-Qualifying Property for Section 1031 Exchange:
For full tax deferral an exchanger must:
Time Requirements for a Like-Kind Exchange
In addition to the procedural steps above, a Section 1031 Exchange is subject to a critical time line and valuation requirements. Within 45 calendar days (including weekends and holidays) of closing the sale of the relinquished property, an exchanger must identify in writing potential replacement properties. Within the earlier of 180 calendar days (including weekends and holidays) of closing the sale of the relinquished property, or by the due date (including extensions) of the exchanger’s federal income tax return, an exchanger must complete the Section 1031 exchange.
This material does not constitute an offer to buy or sell any security. Such offers can only be made through a private placement memorandum or prospectus. There are significant risks associated with 1031 Tenant in Common investments and are not suitable for all investors. Our firm does not provide legal or tax advice. Please consult with your tax or legal professional if considering a 1031 investment.
1031 Exchange Risk Factors:
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