1031 Like Kind Exchange

A like kind, tax deferred exchange is based in the IRS Code Section 1031. This section allows an investment property owner to exchange (sell and purchase) a business or investment property for another business or investment property and to defer the tax on the gain of the sale. There are very specific rules that must be followed in order to take advantage of this procedure.

The initial criteria for starting this process is that you, the taxpayer, must have a business or investment property that you want to sell. How the property is currently used is important. It cannot be personal property or a personal residence. You must identify a replacement property you want to purchase that is currently being used for business or investment by that owner. The replacement property cannot be a personal residence, foreign property or vacation property.

The code places requirements on the purchase price of the replacement property. The replacement property must have a purchase price higher than the sale price of your current property. Also, there are strict prohibitions on control of the funds from the sale of your current property. You cannot have any actual or constructive control over the funds. If you take actual or constructive control of the sale funds, in any way, the entire proceeds are taxable. An intermediary is used to facilitate the completion of the exchange.

An intermediary is used to take control of the proceeds and deliver the funds to the company conducting the closing on the purchase of the replacement property. The intermediary will provide all the needed documents to be sure there is compliance with the code. They also will advise you on the procedure.

Mike takeaway;
Using this IRS code section can defer payment of the tax on the gain when investment or business property is sold.

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