IRC Section 1031

WHAT IS IRC SECTION 1031

IRC Section §1031 is one of the oldest tax planning vehicles available for investment real estate owners and may be the single most important tax strategy that can help clients preserve and grow their investment portfolio. 

IRC Section §1031 allows investors to sell one or more appreciated real estate assets and defer the payment of capital gains tax by acquiring one or more like-kind replacement properties.

Instead of losing potentially up to 35% of their gains/equity to taxes, individuals are able to reinvest nearly 100% of the sales proceeds into a new investment, provided they meet key guidelines.

KEY GUIDELINES FOR 1031 EXCHANGES

Seller cannot receive or control the net sale proceeds – the proceeds must be deposited with a Qualified Intermediary (QI).

Replacement property must be “like-kind” to the relinquished property.

The replacement property must be identified within 45 days from the sale of the original property.  

The replacement property must be acquired within 180 days from the sale of the original property.

The cash invested in the replacement property must be equal to or greater than the cash received from the sale of the relinquished property.

The debt placed or assumed on the replacement property must be equal to or greater than the debt received from the relinquished property.

Incremental value can be funded by assuming more debt or additional cash investment

What Constitutes Like-Kind

Capital gain tax deferment pursuant to IRC §1031 requires the exchange of “like-kind” relinquished property for other “like-kind” replacement property.

Contrary to the commonly held misconception that exchanged properties must be of the exact same type, the actual definition of “like-kind” is very flexible.

Any real property held for investment or real property used in a trade or business can be exchanged for any other real property held for investment or real property used in a trade or business including, among others: 

  • vacant land
  • commercial rental property
  • industrial property
  • 30-year or more leasehold interest
  • farm property
  • residential rental property
  • a beneficial interest in Delaware Statutory Trust (DST)

IRC Section 1031 states “that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment.”