1031 Exchanges of Real Estate

If you considering a trade of one property for another, you should consider how the tax law’s “like-kind” rules would apply to the transaction.

General Rules

Section 1031 of the Internal Revenue Code provides that property held as rental or investment property or property used in your business (“relinquished property”) can be exchanged for “like-kind” property also held as rental or investment property or property used in your business (“replacement property”) allowing you to defer your Federal, state capital gain and depreciation recapture income tax liabilities.

Restrictions

Eligibility requires that properties exchanged be of “like kind.” However, this requirement is broadly defined, so exchanges of real estate or of personal (non-real estate) property will generally qualify. However, some types of property such as inventory and securities won’t qualify for like-kind exchange treatment. And if the exchange involves cash or other non-qualifying property, the receiving party will generally have to recognize gain to that extent.