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Will the Section 1031 Exchange Benefit my Company?

July 10, 2014

Section 1031 of the IRC Code promises tax deferral on "like kind" properties.

Will your company be selling business property that results in a gain? For companies exchanging property used in trade, business, or investment for property of a "like kind" used for the same purposes, section 1031 of the IRC Code allows investors to postpone paying tax on that gain.

What are the rules?

Under section 1031, owners of investment and business property may be eligible for a deferral on an exchange of property so long as they adhere to these rules:

  • The property must be recognized and the exchange must be finished no more than 180 days after the transfer of property.
  • You have 45 days from the day you sell the old property to find prospective replacement properties.
  • Both properties must be used in a trade or business or for an investment. Take note that personally used property does not qualify (i.e. vacation homes).
  • Both properties must be of the same nature, character, or class. Take note that property in the U.S. is not considered like kind to property in other countries.
  • The replacement property must be equal to or greater than the price of the old property.

Section 1031 does not apply to exchanges of:

  • Stock in trade
  • Inventory
  • Stocks, bonds, or notes
  • Other securities or debt
  • Partnership interests
  • Trust certificates

Qualified Intermediary

Another requirement under the section 1031 exchange is that taxpayers must have a qualified intermediary (QI) involved in the process. The QI:

  • Drafts 1031 exchange agreements that agree with the taxpayer's objective.
  • Holds the exchange funds of the relinquished transaction. Note that if the taxpayer has access to the funds, the 1031 exchange is stopped.

What are the advantages to the exchange?

  • Postponing the tax leaves more room for investment.
  • You can replace your burdensome property with one that takes less maintenance.
  • Federal rates could go down in the future, so it may be a profitable time to defer the gain, particularly if the assets are held in a C corporation with the potential for corporate tax reform in the future.

Potential Drawbacks

  • Note that this exchange only postpones tax, it does not eliminate it.
  • Time constraints- Many investors have difficulty finding a replacement property in the 45 day limitation.
  • There are a number of rules and procedures that you are required to follow under the 1031 exchange.

If your company is exchanging property used in trade, business, or investment for property of a "like kind" this exchange could be very beneficial for your business. For more information on 1031 exchanges please contact, please contact us.

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