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In a typical transaction, the property owner is taxed on any
gain realized from the sale. However, through a Section 1031 Exchange, the
tax on the gain is deferred until some future date. Section 1031 of the
Internal Revenue Code provides that no gain or loss shall be recognized on
the exchange of property held for productive use in a trade or business, or
for investment. A tax-deferred exchange is a method by which a property
owner trades one or more relinquished properties for one or more replacement
properties of "like-kind", while deferring the payment of federal income
taxes and some state taxes on the transaction.
The theory behind Section 1031 is that when a property owner has
reinvested the sale proceeds into another property, the economic gain has
not been realized in a way that generates funds to pay any tax. In other
words, the taxpayer's investment is still the same, only the form has
changed (e.g. vacant land exchanged for apartment building). Therefore, it
would be unfair to force the taxpayer to pay tax on a "paper" gain.
The like-kind exchange under Section 1031 is tax-deferred, not tax-free.
When the replacement property is ultimately sold (not as part of another
exchange), the original deferred gain, plus any additional gain realized
since the purchase of the replacement property, is subject to tax.
Source 1031.org
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How do you keep from actually "Receiving"
the $$$? |
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Frequently Asked
Tax Questions And Answers - IRS Site
Keyword: 1031
Like-Kind Exchange
11.4 Sale or
Trade of Business, Depreciation, Rentals: Sales, Trades, Exchanges
Can you sell rental property and reinvest it into rental property
without paying capital gains tax?
No. A deferred exchange will be treated as a sale rather than a tax
free exchange if the taxpayer actually or constructively receives money on
other property in full consideration of the relinguished property.
However, rental property may be exchanged directly for other rental
property of like kind. Gain realized from such an exchange is deferred.
For additional information on like-kind exchanges, refer to
Publication 544,
Sales and Other Dispositions of Assets.
References:
I have heard that I can sell my rental property and use the
proceeds to purchase rental property of equal or greater value and the
transaction is viewed just like an exchange in that the tax is deferred
until the new property is sold. Is this true?
What you have heard about is a like-kind exchange. A like-kind
exchange, when properly executed, represents a way to postpone the
recognition (taxation) of gain essentially by shifting the basis of old
property to new property. If, in addition to giving up like-kind property,
you pay money in a like-kind exchange, you still have no recognized gain
or loss. The basis of the property received is the basis of the property
given up, increased by the money paid. There are several rules and
restrictions that must be strictly adhered to in order for a successful
exchange to take place. Deferred exchanges will be treated as a sale
rather than an exchange to the extent that the taxpayer actually or
constructively receives money or other (not like kind) property in
exchange for the like-kind property given up. For more information refer
to .Publication
544, Sales and Other Disposition of Assets , and
Form 8824 (PDF)
Instructions, Like-Kind Exchanges .
References:
We sold a rental property last year and used the 1031 Tax Deferred
Exchange law to defer the gain into another like-kind property. How do I
report this transaction on my tax return?
Report the exchange of like-kind property on
Form 8824 (PDF),
Like-Kind Exchanges. The instructions for the form explain how to
report the details of the exchange. Report the exchange even though no
gain or loss is recognized.
If you have any taxable gain, resulting from the transaction, because
you had a partially deferred exchange or otherwise received money or
unlike property, report it on
Form 4797 (PDF),
Sale of Business Property, and
Form 1040, Schedule D
(PDF), Capital Gains and Losses. Refer to
Publication 544,
Sales and Other Dispositions of Assets, which has a detailed
section on qualifying like-kind exchanges.
References:
Source IRS
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FAQ's
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