When he was asked in a post exchange follow up, “What particular issue did you find difficult and should have been covered with a thorough explanation,” he replied “There were no issues, the process was quick, seamless and efficient.” “There were no problems.”
Andy Gustafson
Disregarded Entities and 1031 Exchange
Section 1.1031 of the Internal Revenue Code provides for the deferral of capital gain taxes. This is granted in exchange of like property that is being held as an investment or for productive use in a trade or business. There are many rules that must be stricly followed including one known as the same taxpayer requirement. The taxpayer or exchangor can be an individual, husband and wife, trust, partnership, corporation, multi or single member limited liability company (SMLLC). The exception is known as a disregarded entity.
Understanding a 1031 Exchange
Real and personal property held in a trade, business or for investment when sold and replaced with like kind property is provided an exception in Federal Treasury Regulations Section 1.1031. Commonly referred to as a 1031 Exchange, these transactions defer or put off the tax charge associated with gain as the seller essentially trades one property for another that is similar in nature and character. Eventually, the property will be subject to tax when the taxpayer ends up selling the property completely, even if it is sold at a loss given it was depreciated. Consequently, the tax is deferred, postponed, delayed until the property sold is not replaced.
1031 Like Kind Exchange
The capital gain tax implications on the sale of real or personal property held in the productive use of a business or held for investment can be quite substantial, often bringing into question whether or not the sale is still beneficial to the Taxpayer. A Section 1031 like kind exchange (dubbed after Section 1031 of the Internal Revenue Code) is intended to delay the tax on a capital gain to a time in the future. Here is what a person contemplating a 1031 exchange should know.
Capital Gains Taxes
Capital gains taxes are something that most taxpayers will need to be concerned about at some time during their lifetime. At its most basic, a capital gains tax is the tax imposed on the gain realized when a taxpayer sells an asset. For example, if you purchased your home for $100,000 a year ago and sell it tomorrow for $200,000 then you could be subject to capital gains taxes on the $100,000 you made off of the sale. Capital gains taxes can be imposed at the federal, state, or local level. In order for a taxpayer to make wise decisions regarding the purchase or sale of an asset, a basic understanding of capital gains taxes is necessary.
1031 Like-Kind Program IRS Memo FAA 20124801
In the general course of business, a taxpayer who sells an asset may be subject to the payment of capital gains taxes on the gain realized from the sale of the property. Section 1031 of the Internal Revenue Code, however, offers another option – an exchange instead of a traditional sale. When a taxpayer successfully utilizes Section 1031, the capital gains tax that would otherwise be due under a traditional sale is deferred. An example of a straightforward 1031 Exchange would be a taxpayer who relinquishes a piece of rental property and then acquires another similar property that will also be used as a rental. A Qualified Intermediary, or QI, must facilitate 1031 Exchange transactions in order for a taxpayer to benefit from the exchange. Some potential exchanges are considerably more complicated than the previous example; however, even these transactions can potentially qualify for Section 1031 Exchange treatment. Certain types of transactions, for instance, may be eligible for the “Like Kind Exchange Program”, or LKE Program.