1031 Exchange and Like-Kind Exchange Real Estate |
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Like-Kind Exchange Explained (Section 1031)Simply put, if you exchange investment property or business property for a "like-kind" investment property or business property no gain (or loss) is acknowledged under Internal Revenue Service Code Section 1031. If part of the exchanged delivered to you are properties of other "not like-kind" such as money then gain is realized. Section 1031 would not apply to stocks, bonds, inventories, notes and other securities. A Sample 1031 Exchange ScenarioTo further explain let me create a scenario. Farmer John has been a farmer for many years and owns several acres of property on which he has made a living raising and selling livestock. The key thing to point out here is that Farmer John has used the land to create income in the form of grazing livestock. Farmer John is in his mid sixties and is ready for retirement. It just so happens that Developer Bob loves Farmer John's land and thinks it would make a great location for a strip mall. The two agree to a sale price and the deal is ready to go to closing. Farmer John, with the advice of his accountant has determined it would be in Farmer John's best interest to avoid paying gains on the sale by utilizing Section 1031 of the Internal Revenue Service Code. Farmer John may have wanted to retire from farming but he could still enjoy some rental income from a beach condo. The money received from the sale of the farm could be used to buy another investment property such as a rental property or any other property that would be viewed as an investment by Farmer John and more importantly the IRS. It is possible for Farmer John to invest in more than one property to equal the sale price of the farm he sold. Farmer John's funds from the sale of his farm will be held with an intermediary. In essence this is an escrow service that will hold the funds until the like kind exchange has been identified. The intermediary is also responsible for making sure all of the requirements of the like-kind exchange are met. Farmer John has exactly 45 days in which to identify the property or properties he intends to purchase as part of the 1031 exchange. This is when it's critical for Farmer John to find a Real Estate Agent who can move quickly and will not waste a moment of time finding the right replacement properties. Within 180 days of relinquishing his property Farmer John must close on the new property or properties. This scenario gives you a general idea of how a Like-kind exchange would work. Everyone's situation is different when it comes to the varying types of properties and nuances that can occur. You should seek advice from an accountant before committing to participating in a Section 1031 exchange. If you determine that a 1031 exchange is right for you and your real estate goals you should contact me to discuss the types of properties you will be considering as part of the like-kind exchange. I understand the demanding time constraints of the 1031 exchange and will expeditiously move on your behalf to make sure all of the 1031 exchange timeline requirements are met.
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