I.R.C. §1031 TAX DEFERRAL STRATEGIES presentation by Greg D. Smith, Esq. Vice President, Investment Property Exchange Services, Inc. (IPX1031) on 05/28/2020
WHAT IS LIKE-KIND PROPERTY?
In an IRC §1031 real property exchange, as a general principle, you can exchange real property for any other real property in the United States, if the said property is held for productive use in a trade or business or for investment purposes.
INTERNAL REVENUE CODE SECTION 1031
“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.”
If the sale of investment property would have a capital gains tax consequence, the investor can defer the capital gains tax by reinvesting the proceeds in another investment property; in this event, the sales contract should include exchange cooperation language to facilitate the assignment of the contract to the Qualified Intermediary.
BASIC 1031 RULES
In order to obtain a deferral of the entire capital gain tax the Exchanger must:
- REPLACE THE VALUE OF THE DEBT
Replace the value of the debt that was on the relinquished property. This can be achieved by placing a loan on the replacement property of an equal amount, injecting equity from outside of the exchange into the replacement property or a combination of these.
- RECEIVE NO $
Receive nothing in the exchange but like-kind property.
- EQUAL OR GREATER
Purchase property of EQUAL OR GREATER value.
Reinvest ALL of the net proceeds from the relinquished property.
DELAYED EXCHANGE TIME LIMITS
The Exchanger must identify the potential replacement property or properties within the first 45 days of the 180-day Exchange Period.
180 DAY RULE
The Exchanger must acquire the replacement property or properties within the earlier of (a) 180 days, or (b) the date the Exchanger must file the tax return (including extensions) for the year of the transfer of the relinquished property.
There are no extensions for the deadlines. The days are calendar days (including Saturdays, Sundays and holidays).
The time limits begin to run on the date the Exchanger transfers the relinquished property (or the first relinquished property) to the buyer.
The “date of transfer” will be the transfer of the benefits and burdens of ownership.
View the full presentation here.