Tax Deferred Exchanges with 1031s
In the summer of 1990, the I.R.S. came out with long awaited rules on Deferred Exchanges. Section 1.1031 of the Internal Revenue Code laid out, in detail, the procedures for turning a sale and purchase type transaction into an exchange.
Thus, a “1031” is a provision of the Internal Revenue Code that allows Real property owners to exchange their property for other property of the same kind (of a “like kind”) without having to recognize the capital gains for that year. This vehicle is a financial strategy to defer taxes – and use those deferred taxes – to continue investing in the same type of property from which the capital gains have occurred.
The “like kind” provision of Real property is fairly broad, and includes Land, Rental, and Business property as being exchangeable for the other. The “like kind” provision for Personal property is more restrictive.
The property must be in productive use in a business (it must be depreciable property) and can only be exchanged for the same type of property. Thus, for business property, a tractor must be exchanged for a tractor or similar farm equipment. A fixed wing aircraft may be exchanged for another aircraft – fixed wing or rotary (helicopter).
When these exchanges take place, the proceeds of the property must be held within a “safe harbor” while the exchange is in process. As of this writing, a Safe Harbor is defined to be a Qualified Intermediary who passes certain state and Federal requirements.
As attorneys and CPAs, Al Rasch & Associates can keep your exchange transactions legally compliant – while minimizing your taxes and legal fees. For certain clients, we use 1031s as an effective way of expanding their wealth by employing tax dollars for asset growth.