Real Estate Investment: 1031 Exchange

Sep 24, 2014

What is a 1031 exchange (also called a like-kind exchange) and why would you want to do it? If you own investment real estate you may have already engaged in this activity and reaped the benefits, but for others just getting into real estate investment this may be a new topic of conversation.

A 1031 exchange is a swap of one investment asset for another. If done under the rules of 1031 you will in most cases be able to defer any tax due at the time of exchange, which allows your investment to grow tax deferred. You can roll any gain on the swap over into the new investment asset until you actually sell that investment asset for cash at which time you would then recognize any gain.

There are special rules that apply when depreciable property is exchanged. It can trigger gain known as depreciation recapture that is taxed as ordinary income. In general if you swap one building for another building you can avoid this recapture.

Some general guidelines regarding this provision: It is only for investment and business property, most 1031 exchanges are for real estate. Properties are of like-kind if they are of the same nature or character, this can have a broad interpretation. If you receive cash after the exchange is complete this cash may be taxed as partial sales proceeds and is generally considered capital gain.

This is a general overview and there are many other rules and regulations to complete a successful 1031 exchange transaction for which you would want to consult your accountant.

By: Christine Schultz, Accountant

Categories: Uncategorized