Section 1031 Overview
Section 1031 is a provision of the Federal Income Tax Code that allows companies and individuals to exchange property of a like-kind without payment of the capital gains taxes due. The provision has been in the law since March, 1921, and is well settled. Most* U.S. states follow Section 1031 with respect to their own capital gains taxes, however, even the few that do not allow resident taxpayers to exchange for property out of state will allow them to do so in-state.
Depending on the type of property involved, the words “like-kind” are either loosely or strictly construed: some types of property do not qualify at all. Loose standards apply to:
Real Property
Real property is real estate…
- Located within the 50 US states or Washington, D.C. (both given and received).
- Must be defined as “real property” by your state (e.g. water rights are real property in some places and personal property in others).
- May be a leasehold interest, if more than 30 years remain.
- If outside the US, both the given and received properties must be such; no US-International cross-border exchanges are permitted.
If the property given (your Relinquished Property) and the property received (your Replacement Property) are both real property under the law of the state in which they are located there is no further test of similarity.
This explodes a common myth about real estate exchanges. Namely, that what you give and what you take must be virtually identical…
Not So!!
The property given can be land (in Alaska) and the property received can be a multi-family on a leased lot (with 30 years remaining) in Florida. This and similar exchanges will satisfy the like kind requirement.