Section 1031 Exchange Definition

A 1031 exchange named after section 1031 of the u s.

Section 1031 exchange definition. Under section 1031 of the united states internal revenue code 26 u s c. A 1031 exchange is a way to defer paying capital gains tax on the sale of property under section 1031 of the internal revenue service code. If an exchange would be within the provisions of subsection a of section 1035 a of section 1036 a or of section 1037 a if it were not for the fact that the property received in exchange consists not only of property permitted by such provisions to be received without the recognition of gain but also of other property or money then the gain if any to the recipient shall be.

The tcja restricted the tax deferral benefits solely to exchanges of real property. No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely. Irc section 1031 a 1 states.

We ll discuss like kind property in more detail in section four. Like kind exchanges when you exchange real property used for business or held as an investment solely for other business or investment property that is the same type or like kind have long been permitted under the internal revenue code. Internal revenue code is a way to postpone capital gains tax on the sale of a business or investment property by using the proceeds to buy a.

However the statutory amendment left open the definition of real property for section 1031 purposes. Prior to the tcja both real property and personal property were eligible for like kind exchange treatment. Thanks to irc section 1031 a properly structured 1031 exchange allows an investor to sell a property to reinvest the proceeds in a new property and to defer all capital gain taxes.

1 to put it simply this strategy allows an investor to defer paying capital gains taxes on an investment property when it is sold as long another like kind property is purchased with the profit gained by the sale of the first property. In real estate a 1031 exchange is a swap of one investment property for another that allows capital gains taxes to be deferred. The term 1031 exchange is defined under section 1031 of the irs code.

1031 a taxpayer may defer recognition of capital gains and related federal income tax liability on the exchange of certain types of property a process known as a 1031 exchange in 1979 this treatment was expanded by the courts to include non simultaneous sale and purchase of real estate a process sometimes called a.