Learn More about 1031 Like-Kind Exchanges and Resources in the Traverse City Michigan Region:
Like 401K, 1031 is becoming a common term among Real Estate Investors. Simply put, it refers to a section of the tax code that allows tax deferral on capital gains. Effectively, it allows investors to accumulate more wealth.
Here is an example that demonstrate how Like-Kind Exchange works:
Generally, these transactions require: a tax professional, an attorney, a qualified intermediary and a real estate professional to complete successfully. I do not claim to be a tax professional or an attorney but it is my understanding that when transacted properly, fees and commissions can be deducted.
How 1031 tax treatment began:
Starker Case Law:
Here are some tax forms and instructions that will provide insight:
Like-Kind Exchanges Under IRC Code:
1040 Schedule D – Capital Gains and Losses:
Sales and Disposition of Assets:
Sale of Business Property:
Some Useful Terms:
- Like-Kind Property
- Any property used for productive use in trade or business or held for investment; Both the relinquished and replacement properties must be considered "like-kind" to qualify for tax deferral.
- Deferred Exchange
- The 1031 Exchange allows you to sell one or more appreciated assets (generally rental or investment real estate, but could be non-real-estate) and defer the payment of your capital gain taxes by acquiring one or more replacement properties. 1031 Tax Deferred Exchanges allow you to keep 100% of your money (equity) working for you instead of paying (losing) about one-third (1/3) of your funds (equity) to taxes.
- There are, of course, very specific requirements that you must follow so that your sale transaction will qualify for 1031 Tax Deferred Exchange treatment under Section 1031 of the Internal Revenue Code (tax code).
- Reverse Exchange
- A type of property exchange wherein the replacement property is acquired first, and then the current property is traded away. Reverse exchanges were created in order to help buyers who found a new property that they would like to purchase before they were able to trade in a current property.
The opposite of a reverse exchange is a deferred exchange.
- Relinquished Property
- Property given up by the Exchanger; Also referred to as the sale, exchange, ‘downleg’ or ‘Phase I’ property.
- Replacement Property
- Property received by the Exchanger: Also referred to as the purchase, target, ‘upleg’ or ‘Phase II’ property.
- Qualified Intermediary
- The entity who facilitates the exchange; Defined as follows: (1) Not a related party (i.e. agent, attorney, broker, etc.) (2) Receives a fee (3) Receives the relinquished property from the Exchanger and sells to the buyer (4) Purchases the replacement property from the seller and transfers it to the Exchanger; Asset Preservation, Inc. (API) is a "Qualified Intermediary."
- "Non like-kind" property received; "Boot" is taxable to the extent there is a capital gain.
Ten Things to Know about 1031 Exchanges
Forbes Article authored by Robert W. Wood:
Another Source of Information:
Newsletter – Traverse City, MI CPA /Stephen D Gallagher
Local Exchange Attorneys:
Local Exchange Tax Professionals:
Examples of Like-Kind Exchanges:
- Rental House = Vacant Land
- Rental House = Rental House
- Rental House = Shopping Center
- 1 Rental House = 1 Rental House + 1 Shopping Center
- Certain types Personal Property can qualify
- Personal Property:
- Investment Art = Other Investment Art
These are NOT Examples of Like-Kind Exchanges:
- Inventory or stock in trade
- Stocks, Bonds or Notes
- Securities or Debt
- Partnership Interests
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