The federal and state capital gain and depreciation recapture tax deferral 1031 exchange strategy is recognized by the Department of the Treasury and enforced by the Internal Revenue Service (IRS). The Internal Revenue 1031 Code applies to real, tangible and intangible personal property held in the productive use of a business or investment. Real property includes land, single family residential rentals, condominiums, commercial property and oil and gas royalties. Any tangible personal property, such as aircraft, furniture, cars, trucks, equipment, railroad cars and locomotives, livestock, artwork, gold and silver bullion, vintage sport cars and collectibles, are eligible for the tax deferral. Intangible property includes franchise rights, TV and Radio licenses, fishing permits and patents to name a few.
Andy Gustafson
Realtors Should Know Three 1031 Exchange Keys
Realtors are usually one of the first to determine that a 1031 exchange should be considered when an individual, husband and wife or company is selling real estate. “Usually” is the operative word given the seller may not share their intent to replace with another property. Nonetheless, whenever the seller is selling a property that is not their primary residence, the question, “Does a 1031 exchange make sense?” should be asked. Be sure to have a couple of qualified intermediaries to refer who can readily answer questions. As a qualified intermediary (QI), I receive calls from sellers and Realtors who just closed or closed the selling transaction a couple of weeks ago to ask “Is it too late?” Yes, once the seller has access to the net proceeds, the exchange cannot take place unless the transaction is unwound and restarted.
1031 Replacement Property Identification Insight
A 1031 exchange defers the federal and state capital gains and recapture depreciation taxes triggered when selling and replacing real and personal property held in a business or for investment. The Internal Revenue Code Section 1031 requires meticulous attention to the rules. Identifying the potential replacement property by the 45th calendar day is one of the rules required for each 1031 exchange, unless the replacement property is acquired within the first forty five days post-relinquished property closing.
1031 Exchange Defined
A 1031 exchange enables taxpayers to defer federal and state capital gain and depreciation recapture taxes when selling and replacing property held in a business or for investment. The tax deferral represents an indefinite, interest free loan or additional working capital for use towards the replacement property acquisition. The tax does not go away but is due once the replacement property is sold unless another 1031 exchange is initiated.
Personal Property 1031 Exchange
Personal property held in the productive use of a business when sold triggers a federal and state capital gain tax on the appreciation and a twenty five percent depreciation recapture tax that is deferrable in a 1031 exchange. The tax can be sizable given past years of bonus depreciation. If the owner will replace with like-kind or like-class property of equal or greater value than the net sales price, the deferral represents additional working capital or an indefinite interest free loan until the replacement property is sold or another 1031 exchange is initiated.
1031 Exchange and Primary Residence
A 1031 exchange allows the taxpayer to defer federal and state capital gain and depreciation recapture taxes when selling and replacing real and personal property held in the productive use of a business or for investment. The tax deferral strategy is not to be used for second homes with greater than 14 overnights of personal use or for those properties held primarily for profit such as flipping. Taxpayers whose income is derived primarily from real estate can utilize the 1031 exchange, but must be careful to hold those properties with the intent (good fact pattern) of investment including time, in a rental pool, limited personal use and separate from their normal business activity. Inventory, indebtedness, stocks and securities, partnership interests and primary residences are not eligible for a 1031 exchange.