Source: https://www.rewardrealty.org/blog/what-is-a-1031-exchange.html
Timestamp: 2019-01-18 12:57:17
Document Index: 678491918

Matched Legal Cases: ['§ 1031', '§ 1031', '§ 1031', '§ 1031', '§ 1031', '§ 1031']

Posted by Reward Realty on Wednesday, March 14th, 2018 at 12:17pm.
IRC § 1031 of the Internal Revenue Code provides 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. A tax-deferred exchange is a method by which a property owner trades one or more relinquished properties for one or more replacement properties of “like-kind”, while deferring the payment of federal income taxes and some state taxes on the transaction. The theory behind IRC § 1031 is that when a property owner has reinvested the sale proceeds into another property, the economic gain has not been realized in a way that generates funds to pay any tax. In other words, the taxpayer’s investment is still the same, only the form has changed (e.g. rental house exchanged for apartment building). Therefore, it would be unfair to force the taxpayer to pay tax on a “paper” gain. The like-kind exchange under IRC § 1031 is tax-deferred, not tax-free. If and when the replacement property is ultimately sold (not as part of another exchange), the original deferred gain, plus any additional gain realized will be subject to taxation.
In a typical transaction, the property owner is taxed on any gain realized from the sale. However, through an IRC § 1031 Exchange, the tax on the gain is deferred until some future date, or even indefinitely. By deferring the tax, you have more money available to invest in another property. In effect, you receive an interest free loan from the federal government, in the amount you would have paid in taxes. Any gain from depreciation recapture is postponed. And, you can acquire and dispose of properties to reallocate your investment portfolio without paying tax on any gain.
IRC § 1031 requires that the replacement property be identified within 45 days of closing on the relinquished property. This identification period is strictly enforced and violation will defeat the tax deferral.
IRC § 1031 requires the replacement property be purchased within 180 days of closing on the relinquished property OR the date the taxpayer’s tax return is due, whichever date is first. The purchase date is considered to be the closing date. For tax return due dates that fall before the 180 days, a tax return extension can be filed. However, a taxpayer can never amend their return for extension purposes.
• 95% Rule: The taxpayer may identify as many properties as desired, but before the end of the exchange period the taxpayer must acquire replacement properties with an aggregate fair market value equal to at least 95% of the aggregate fair market value of all the identified properties.
The IRS generally does not allow extensions for either the 45-day period or the 180-day period. In rare instances, such the time Florida had several disastrous hurricanes in a row, the IRS may grant extensions for taxpayers located in nationally declared disaster areas.
This blog entry is intended to be used as guidance for some initial questions you might have regarding 1031 exchanges. If you are interested in learning more or using this program, we advise you to speak with a 1031 intermediary who can answer any additional questions you might have regarding the process.