If you’re a business owner with highly appreciated business or investment real estate there is a tax planning strategy you should know about before you consider selling your property. It is a Section 1031 “like kind” exchange. It can help defer taxes on the disposition of appreciated property indefinitely.
Internal Revenue Code Section 1031 permits you to defer recognizing gains on real or personal property used in a business or held for investment if, rather than selling it, you exchange it solely for property of a “like kind.” This type of arrangement is known as a “like-kind exchange.” The tax benefit of such an exchange is that you will defer tax that is otherwise payable on a sale, thus giving you the use of the tax savings until you sell the replacement property.
Personal property must be of the same asset class. However, an exchange of almost any type of real estate will qualify as long as it’s business or investment property. For example, you can exchange a warehouse for residential apartments, or a shopping mall for an office building.
Arranging the Deal
While an exchange may seem relatively straightforward when dealing with personal property such as cars or trucks, it’s generally rare for two owners to simply trade real property. You’ll probably need to execute a “deferred” exchange, in which you use the services of a qualified intermediary (QI) for assistance.
When selling your property (the relinquished property), the net proceeds go directly to the QI, who then uses the funds to acquire replacement property. To qualify for tax-deferred treatment, you must identify the replacement property within 45 days after the transfer of the relinquished property and complete the purchase within 180 days after the initial transfer.
Another approach used when dealing with real estate is a “reverse” exchange. This requires a third party known as an exchange accommodation titleholder (EAT) to acquire title to the replacement property before you sell the relinquished property. You can defer the tax on your gain by identifying one or more properties to exchange within 45 days after the EAT receives the replacement property and, completing the transaction within 180 days.
The tax benefits from a like-kind exchange can be substantial, and therefore, it is important that you use the services of tax consultant to structure your 1031 exchange. You don’t want to exchange the wrong kind of property or receive cash in the transaction which will cause you to incur an unexpected tax liability. Our tax planning consultants regularly help taxpayers throughout Florida, including Boca Raton, Ft. Lauderdale, West Palm Beach and Tampa with tax savings strategies, and can help you as well.