What is a 1031 exchange?
As defined in Section
1031 of the Internal Revenue Code of 1986, as amended,
"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."
In other words, a properly structured 1031 exchange allows an
investor to sell a property and defer all capital gains taxes so
long as they reinvest the proceeds in a new property within a clearly
defined time frame.
You can defer all capital gain on your transaction by doing all
of the following:
- purchasing property that is equal to or greater in
value than your relinquished property;
- reinvesting all of
the net equity from your relinquished property in the replacement
property; and
- acquiring debt on the replacement property that
is equal to or greater than the debt on your relinquished property
(debt on the replacement property may be offset by contributing
an equivalent amount of additional cash)
You can also complete a partial exchange, but this will incur
tax liability on the non-qualifying portion.
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