An Overview On 1031 Like-Kind Property Exchanges
If you consider yourself a real estate investor who is planning to relinquishing an investment property or exchange it with a new investment property, you must be worried about realizing capital gains. According to the rules defined by the IRS, you must pay the capital gains taxes on the gains from a sale of a property. However, there are ways through which you can decrease your tax liability or even eliminate it altogether. One such way is conducting a 1031 like-kind property exchange.
Defining “Like-Kind” Properties
To qualify for a 1031 exchange and defer the capital gains taxes on your sales proceeds, you must reinvest in a like-kind property. However, the rules related to this exchange do not require you to find a replacement property of the exact same type as relinquished property.
In fact, any property you hold for investment purposes is considered like-kind. Here are some of the examples:
- Unimproved property
- Farm lands
- Improved property
- Commercial buildings
- Industrial property
- Resort property
- Rental property
The only exception to the 1031 exchange rules, however, is that you can not exchange a primary residence. The property must solely be held for investment purposes.
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Like-Kind Personal Property
Personal properties also qualify for 1031 like-kind property exchanges. Though, you can not exchange a personal property with a real estate or vice versa, you can trade one type of personal property to qualify for the like-kind exchange.
To qualify, this personal property must only be “held for product use in a business or trade or for the sole purpose of investing.” Moreover, according to the rules defined by the Standard Industrial Classification Manual, the two items being exchanged must hail from the same asset or product class for tax purpose.
Some examples of personal property that qualify for like-kind exchanges include electronic equipment, gold coins, commercial business equipment etc.
Some Things To Consider
Conducting a 1031 exchange can be a complex process. Therefore, it is recommended to work with a trusted advisor who understands the complexities of the rules surrounding 1031 exchanges. They must also understand rules like the holding period of the property being relinquished, eligible replacement properties and the 1031 exchange timeline.
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