1031 Exchange

1031 Exchange Laws In Simple Words

Capital gains tax deferment is available to tax payers in respect of exchange of like-kind US located real properties held for productive use or investment. The 1031 Exchange Laws provide this benefit. These are part of US internal revenue code (IRC) section 1031 of the income tax laws.

The details of important 1031 Exchange Laws are described below.

The basis of the above benefit lies in the recognition that no loss or gain occurs to a tax payer in case he/she exchanges one real property owned by him for productive use in business or trade or solely for investment purpose with another like property.

Exchanges of stocks, bonds, notes, securities, debt instruments, certificates of trust, and interests in partnership are not covered under section 1031.

The replacement property or the property to be received in exchange must be identified by the tax payer within 45 days of the date of sale of the property relinquished by him/her.

Further, the replacement property must be purchased by the tax payer within 180 days of a certain date. This date is the earlier one of the date of sale of the property relinquished by him/her and the due date of the tax return of the fiscal in which the tax payer sells the relinquished property.

In case gain occurs to a tax payer for non-like property exchanges covered under the subsections (a) of sections 1035, 1036, or 1037 of the income tax laws and in case the replacement property is a composite property, part of which is covered under the above provisions and in which respect no gain occurs and part of which is other property and involves cash profit too, then the profit to the tax payer shall be recognized in an amount not exceeding the cumulative sum of the cash profit and the market value of such other property.

In case loss occurs to a tax payer for non-like property exchanges covered under the subsections (a) of sections 1035, 1036, or 1037 of the income tax laws and in case the replacement property is a composite property, part of which is covered under the above provisions and in which respect no gain or loss occurs and part of which is other property and involves cash too, then no loss to the tax payer shall be recognized.

Exchanges of different genders of livestock are not covered under section 1031.

In case a tax payer sells a property to a related person, the latter cannot resell it before 24 months have elapsed after acquiring it. Further, if the related person resells it for cash, potential abuse of the provisions of section 1031 may be triggered. In case a tax payer buys the replacement property from a related person, again potential abuse of the provisions is triggered. As such, in both cases, such transactions are not allowed.

In case a tax payer violates any provisions of the 1031 Exchange Laws, capital gains tax will be leviable.