What Is Section 1031?

Section 1031 is a federal tax provision that allows a business or investment property owner to defer federal taxes on the gai𝄹ns from the sale of property if the pro♔ceeds are reinvested in other properties. The process is termed a like-kind exchange.

The provision can be used by business owners or property investors who are selling one property and reinvesting the proceeds in one or more other proper🍰ties. It is not available to buyers or sellers of homes for personal use.

Qualifying like-kind exchaꦆnges are sometimes called Starker exchanges. Section 1031 of the U.S. Tax Code is⛄ sometimes known as the Starker Loophole.

Understanding Section 1031

Section 1031 has been called the Starker Loophole since a 1979 court ruling concluded that an agreement to exchange property within certain time limits is essentially the same as a simultaneous transfer of property.

The loophole used to be much more generously defined. Before Dec. 31, 2017, like-kind property could be any of a broad range of real and tangible persona🐈l property held for business or investment purposes including franchises, art, equipment, stock in trade, securities, partnership interests, certificates of trust, and beneficial interests.

For 1031 exchanges concluded after 2017, the only permissible property is business or investment real estate.

Rules for Using Section 1031

Section 1031 defers tax on swaps of like-ki🐟nd real estate done in a timely manner. There are a number of important steps to a properly structured💮 1031 exchange: 

• The real estate purchased with the proceeds must be like-kind. For example, the proceeds of the sale of an apartment building could be used to buy another apartment building.
• The tax must be paid on any “boot” in the year of the 1031 exchange. A boot is an addition to the swap agreement that is not real estate, such as cash.
• Once the business or investment real estate is sold, like-kind real estate must be identified within 45 days and acquired within 180 days.

About Like-Kind Real Estate

Section 1031 defines 澳洲幸运5官方开奖结果体彩网:like-kind as real estate that is held for productive use in a trade or business or for investment purposes. Section 1031 defers tax when this real estate is exchanged in a properly structured 1031 exchange for like-kind real estate that continues to be held for productive use in a trade or business or for investment.

About the "Boot"

Section 1031 allows an investor to give or receive cash or other property that is not like-kind in addition to the like-kind real estate being exchanged. Such additions to the deal, when given or received in a 1031 exchange, is called “boot.”

Th𝔉e boot triggers taxable gains or loss🐼es in the year of the exchange. The taxable amount that is not deferred by Section 1031 is the amount of the boot. 

The taxable amount that is deferred by Section 1031 is the capital gain or loss on the like-kind real estate exchanged.

Timing of the Exchange

Section 1031 gives a taxpayer who sells business or investment real estate 45 calendar days from the closing to identify up to three (🎃and under certain circumstances four or more) like🉐-kind replacement real estate properties.

The replacement must be acquired and the 1031 exchange completed by the earlier of 180 calendar days or the due date (with extensions) of the taxpayer’s return.

Reporting a 1031 Exchange 

Even though the tax is deferred and no gain or loss is recognized, the 1031 exchange must be reported on , Like-Kind Exchanges. The form's instructi🐓ons explain how to report the details of the 1031 exchange.

The gain recognized from the boot is reported on Form 8949, Schedule D (澳洲幸运5官方开奖结果体彩网:Form 1040), or 澳洲幸运5官方开奖结果体彩网:Form 4797, as applicable. If 澳洲幸运5官方开奖结果体彩网:depreciation must be recaptured, this recognized gain may have to be reported as ordinary income.

There is a high level of complexity involved in the 1031 exchange process, and mistakes can result in significant costs. With that in mind, there are advantages to working with a 澳洲幸运5官方开奖结果体彩网:1031 exchange company.

In general, these companies cost less than attorneys, and a firm with an est🔴ablished track record can ensure that your like-kind exchange fulfills the requirements of the tax code.

The Bottom Line

Section 1031 of the federal tax code is 𒐪a major tax deferral for businesses and investment property owners who sell one property and use the proceeds to buy another simila🔥r property.

If you use this tax break, tread carefully and consult an expert. The rules on the purchase and sale process are complicated. And, the rules on eligibility are tough and they've gotten tougher in recent years.