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What a Section 1031 Exchange Is and Is Not

An Exchange Is:

  • For commercial properties, rental homes, farms, vacant land and personal property.
  • Counseling process between the client/property owner and a trained exchange specialist.
  • A marketing strategy for the client’s property.
  • Called for when the capital gains to be released by the proposed sale of property are high, eg. over $10,000.
  • Definitely recommended when the client desires to acquire other property, even in another state, with the proceeds of the sale of the subject property.
  • More desirable the lower the debt on client’s property.
  • A process of matching the property being given up to the property being received.
  • Completely tax free when the client goes up (or even) in value and up (or even) in debt with qualified replacement property.
  • More desirable the lower the tax basis of client’s property.
  • More desirable the longer the client has owned the property.
  • Rarely the direct exchange of the client’s property for someone else’s.
  • Usually a carefully planned escrow process wherein cash provided by a buyer for client’s property goes directly to the seller of property desired by the client.
  • A process of tax avoidance where the client’s tax basis in the property given up is shifted to the property ultimately received.
  • A team effort between client, broker, attorney, accountant and exchange specialist.
  • Possible when the client gives up a single property and wishes to acquire several properties.
  • Possible when the client gives up several properties and wishes to acquire a single property.
  • Possible when the client owns a joint or fractional interest in property and wishes to go to a full interest in that (or another property)
  • Permitted to be used by individuals, trusts, partnerships and corporations for the exchange of that person’s or entity’s assets for other qualifying assets to be held by the same person or entity.
  • Can be used for the exchange of such things as remainder, timber, water or mineral interests, or certain leaseholds.
  • Easily understood by laymen.

An Exchange Is Not:

  • For personal or vacation homes unless these properties are first rented out to others.
  • A process where someone with property desired by the client must be found to take client’s property, all at the same values and debt levels (a near impossibility).
  • Limited by the size, value, degree of improvement or debt levels of either property.
  • A process where cash for unqualified purposes can be extracted from the transaction.
  • Suitable for disposing of ownership interests in any trust, partnership, or corporation.
  • Suitable for disposing of “good will” or “going concern value” in businesses.
  • Allowed by IRS if qualified replacement property is not designated by the client within 45 days of the date of transfer of the client’s property.
  • Allowed by IRS if not completed within 180 days (as adjusted) of the date of transfer of the client’s property.
  • A tax-code provision to be taken lightly; however, if this provision is properly applied, it can save you or your client a great deal of money in deferred income taxes.