
A 1031 Exchange is a method of deferring capital gains for owners of real property. The method allows savvy investors to sell a property and use those proceeds to purchase a “like-kind” property without triggering capital gains.
Two properties are of “like-kind” if they are of the same nature or character, even if they differ in grade or quality. Both properties must be held for use in a trade or business or for investment. Property used primarily for personal use, like a primary residence or a second home or vacation home, does not qualify for like-kind exchange treatment. Additionally, an exchange of real property held primarily for sale does not qualify as a like-kind exchange.
The IRS is fairly liberal in its interpretation of like-kind properties and views almost all real estate as similar in nature or character. For example, an apartment building would generally be of like-kind to unimproved land. Any mixture of office buildings, apartment buildings, shopping centers, stores, hotels, and farms is permitted. However, real property in the United States is not of like-kind to real property outside the United States.
The significance of a 1031 Exchange is the ability to defer capital gains related to ownership of that property. For example, in 2010 an investor purchases a restaurant for $100,000. Ten years later, that same investor wants to sell their restaurant and invest in rental properties. In 2020, the restaurant is now worth $200,000. With a 1031 Exchange, the investor can sell the restaurant and invest all $200,000 into rental properties without recognizing capital gains. In other words, the investor carried over their basis in the original property, plus any gains from the transaction.
If you think a 1031 Exchange would benefit you, it is important to follow the correct procedures and communicate with an attorney and CPA. The attorneys at Simpson, Jensen, Abels, Fisher & Bouslog, P.C. are experienced in handling 1031 Exchanges. If you have questions or need assistance, contact us a (515) 288-5000 to discuss your matter with our firm.
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