Section 1031 Exchange Rules

An exchange of real property held primarily for sale still does not qualify as a like kind exchange.

Section 1031 exchange rules. 2 exception for real property held for sale. 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 for real property of like kind which is to be held either for productive use in a trade or business or for investment. 1031 states the recognition rules for realized gains or losses that arise as a result of an exchange of like kind property held for productive use in trade or business or for investment.

The properties being exchanged must be considered like kind in the eyes of the irs for capital gains taxes. Under the tax cuts and jobs act section 1031 now applies only to exchanges of real property and not to exchanges of personal or intangible property. 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.

The 1031 exchange refers to the use of section 1031 of the united states internal revenue code 26 u s c 1031 and it allows real estate investors to make the most out of their investments by exchanging one investment property for another similar property. The term 1031 exchange is defined under section 1031 of the irs code. If as part of the exchange you also receive other not like kind property or money you must recognize a gain to the extent of the other property and money received.

It states that none of the realized gain or loss will be recognized at the time of the exchange.