Question

Section 1031 Exchanges- Please explain

o What is like kind property in tax accounting?

o How long does one have to complete a like-kind exchange?

o Requirements for it to be a tax-free exchange?

Answer 1

The term 1031 Exchange is a provision which allows an investor to “defer” paying capital gains taxes on an investment property when it is sold, if another “like-kind property” is purchased with the profit gained by the sale of the first property.

1. The term like kind property refers to the nature or character of the property, rather than its grade or quality. this means that there is a wide range of exchangeable real properties it is any property held for investment, trade, or business purposes under Section 1031,this means both properties involved in the exchange must be for business or investment purposes not personal residencies.

2. To receive the full benefit of a 1031 exchange taxpayers have 45 days to identify the replacement propert to be purchased and withing 180 days the exchange needs to be concluded.

3. The exchange to be tax free replacement properties net market value and equity of the property purchased must be the same as, or greater than the property sold.

Further a taxpayer must not receive “Boot” in order for the exchange to be completely tax-free.

Further the tax payer the seller of property and Buyer of property title person should be same.

And the above points 1and 2 conditions also to be satisfied for tax free exchange.