A Section 1031 exchange is a way for owners of investment real estate to sell their real property and buy other “like-kind” real property while deferring Federal and State capital gains taxes. “Like-Kind” is defined as any property that is considered real estate in the 50 US states. You can sell an apartment building in Maine, and replace it with a single-family home in Florida if both properties are held for investment purposes.
The like-kind exchange is tax-deferred, not tax-free. But, by deferring the tax you have more money available to invest in another property. In effect, you receive an interest-free loan from the federal government, in the amount you would have paid in taxes. You can use Section 1031 as many times as you would like, for as long as you like. From an estate planning perspective, Section 1031 can assist you in NEVER paying the tax.
A Qualified Intermediary (QI) is required to facilitate Section1031 transactions. A QI is an independent party who acts under a written agreement with the taxpayer to acquire the relinquished property and transfer it to the buyer thereby preventing the taxpayer from having constructive receipt of the funds.
Starting January 1, 2018, new 1031 tax law changes become effective, removing the ability to exchange personal property; however, Real Property exchanges are unchanged. Contact Ballou & Bedell and we will guide you through the purchase or sale of your property while assisting you with strategizing for, and then structuring a like-kind exchange through a trusted 1031 Exchange Agent.
In a nutshell, a Section 1031 Exchange is an excellent strategy for owners of property to put what would have been a capital gains bill to work for them in the real estate class of investments.