A 1031 exchange allows taxpayers owning real and personal property in a trade, business or investment to defer the federal and state capital gain and depreciation recapture taxes when selling and replacing with like-kind real and personal property. The tax deferral postpones the tax payment until the replacement property is sold and the taxpayer cashes out. Should the taxpayer elect to initiate another 1031 exchange, the tax deferral continues. The tax does not go away,but rather is postponed given the replacement property has a purchase price equal to or greater than the relinquished or old property. Should the taxpayer replace less than the relinquished net selling price, then a tax is triggered on the difference, known as a partial exchange. The premise for the 1031 exchange is that the taxpayer’s economic position has not changed from the sale to the purchase; no benefit is received such as cash or reduction in debt. There are many rules to follow in a 1031 exchange, including the use of an independent, third party known as a Qualified Intermediary (QI), to accommodate the 1031 exchange.
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