What is a 1031 Exchange?
1031 refers to the section of the Internal Revenue Code that allows properties to be exchanged for like-kind properties in order to defer capital gains tax. If the transaction is structured correctly, tax on the gain can be deferred until such time as the investor may be in a lower tax bracket.
The Internal Revenue Code states:
"No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment."
The property must be held for business or investment purposes and must
be traded for business or investment purposes. (Personal residences do not
qualify.) Property does not qualify if it is part of a business' inventory
such as spec home. It must be tangible real estate. However, it can be real
estate for real estate. Some think you have to exchange a duplex for duplex.
Not true.
How much does it cost?
The rates vary depending upon the transaction, but typically run from a few hundred dollars.
Can you do this for me?
No. The IRS requires that you use a qualified intermediary. In Utah, clients often use a 1031 specialist at their local title company. It is highly recommended that you speak with your CPA or tax consultant prior to entering into an exchange. A qualified intermediary merely handles the transaction. They do not give tax advice.
How do I find a qualified intermediary?
We will be happy to recommend a qualified intermediary or you may consult with your CPA or attorney.
What is boot?
It is cash received by the taxpayer after the exchange. It does not disallow the exchange, but you will pay ordinary income tax on the boot portion of the transaction.
There are other rules and considerations for 1031 exchanges. Contact me today at 554-9988 and I will be happy to discuss them with you and see how they apply to your particular situation.