Defer Tax Payments on Property with a 1031 Like-Kind Exchange

1031 like-kind exchange

Capital gains tax on sales of certain types of real estate can be deferred under Section 1031 of the Internal Revenue Code as long as a few specific requirements are met.

When looking to sell real estate one expense you may not have fully considered is the tax on any gains you may undertake from the sale of real estate.  Capital gains tax on sales of certain types of real estate can be deferred under Section 1031 of the Internal Revenue Code as long as a few specific requirements are met.

Internal Revenue Code Section 1031

The exact wording of Section 1031 is as follows:

“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 either for productive use in a trade or business or for investment.”

If one property is sold, the seller may defer capital gains tax on that property by purchasing another property. If various provisions are complied with, then the owner of the first property will not have to pay tax on the original sale until the replacement property is sold.  If the seller wants to continue to defer the taxes, then additional replacement properties could be purchased. 

Challenges with a Like-Kind Exchange

While a 1031 like-kind exchange is a good way to defer taxes on gains, there are very limited periods to identify possible replacement properties and to close on the purchase of the replacement property(ies).  Plus, the seller of the initial property looking to do the exchange will have to enter into another transaction to buy another property with potentially less-favorable terms since it will be a quick sale, and they will not be able to hold onto all of the capital from the initial sale as some or all of it is reinvested into the replacement property.

Contact The Law Offices of Kirk Halpin & Associates, P.A. Today

Practicing together in Howard County since 2004 – first in Columbia and now in Clarksville, The Law Offices of Kirk Halpin & Associates, P.A., is here to help with a variety of business, real estate and finance law issues. We have a long list of practice areas, a long list of industries served, and a long list of success stories and recommendations in helping businesses, no matter the size, grow, reach their goals, and surpass them. If you’re seeking counsel on a business, real estate or finance law issue, always feel free to contact us via our contact page or call us at (410) 531-1700. While you are here, remember to follow us on Facebook, Twitter, Google+, and LinkedIn to stay up to date with our blog and the latest happenings at our firm.

This entry was posted on Monday, January 16th, 2017 at 3:35 pm. Both comments and pings are currently closed.

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