Accounting For 1031 Like Kind Exchanges
Accounting For 1031 Like Kind Exchanges
What Is A 1031 Exchange?
The 1031 exchange (also know as tax-deferred exchange) gets its name from section 1031 of the US Internal Revenue Code, which addresses the issue of the deferment of capital gains from the exchange of properties. Capital gains (or losses) are typically realized from the sale of property, so the 1031 Exchange defers the taxes on those capital gains that you would normally be responsible for when filing your taxes for the specific year. A homeowner or property investor can legally save a significant amount of money when qualifying for a 1031 Exchange.
Qualifying For the 1031 Tax-Deferred Exchange
In order for an individual to qualify for this, the properties which have been exchanged must have been owned for productive use, such as:
- an investment
- business purposes
- used in a trade
Section 1031 specifically excludes the following from being qualifying aspects:
- bonds
- stocks
- properties that do not fit the above criteria
Certain securitized properties will qualify. One of the key factors involved in the qualifying of the 1031 Exchange process is that the properties concerned must be considered as “like-kind”. In other words, they must be of the same character or nature, regardless of any differences in the grade or quality of those properties. Additionally, personal or real properties that are of the same character and nature are considered like-kind properties, whether they are improved or not.
Conversely, personal or real property in the United States and those properties that are used elsewhere are not considered to be like-kind properties. So if one of the properties is located in the US and the other is not, they will not qualify for the 1031 Exchange tax break. As you can well imagine, the ruling has to be followed to the letter in order to benefit from it.
The IRS has specific guidelines that must be met in order for a property to qualify for the benefits of a 1031 tax-deferred exchange. To summarize things, you
- are not allowed to receive any material benefit from the sale of the property
- must clearly identify potential replacement properties, and
- complete the transaction within certain time frames.
Additional Considerations For The 1031 Tax-Deferred Exchange
1031 exchanges carry risks if you don’t follow the rules. Your income tax burden can be lightened considerably if you qualify for the 1031 Exchange whenever capital gains are involved. If you feel that you are in a position to qualify for this and take advantage of it, it is recommended that you consult with an accountant who specializes in tax accounting or a licensed tax preparer. The Internal Revenue Code is very specific and very strict, as well as being difficult to interpret by the average person. So before exchanging properties, it is advisable that you consult with a qualified professional in order to avoid any future complications with the IRS.
© Accounting For 1031 Like Kind Exchanges
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