What is a 1031 Exchange?
The Internal Revenue Code* provides that a taxpayer may sell real property held for productive use in a trade or business or for investment and defer payment of capital gains tax, if that taxpayer uses the proceeds to acquire a like-kind replacement property.
Why Exchange?
- Capital gains tax is significant
- Reinvestment into replacement property allows taxpayer to leverage dollars that would otherwise be spent on taxes
- Allows for non-income producing property to be replaced with income-producing property
- Allows taxpayer to diversify portfolio and minimize risk
As a result of tax reform legislation, 1031 exchanges are no longer allowed on personal property, effective January 1, 2018. Below are examples of like-kind real property transactions that still qualify for IRC Section 1031 treatment:
- Commercial building for a ranch or farm
- A leasehold interest of 30 years or more for a fee interest
- Rental house for farmland
- Improved real property for unimproved real property
- Conservation easement in one farm for fee interest in another farm
- A utility easement for a utility easement