Tax-free Exchanges

A tax-free exchange of one investment/business real property for another is provided for by Section 1031 of the Internal Revenue Code. Section 1031 allows a property owner to sell the real property and reinvest the proceeds by purchasing “like-kind” real property. This transaction, when conducted properly, enables the property owner to defer capital gain taxes. This is the primary advantage of a tax-free exchange: the taxpayer may dispose of real property without incurring any immediate tax liability.

Real property must be exchanged for “like-kind” property; however, “like-kind” simply means that real property must be exchanged for real property, and all real property is “like-kind.” For example, a single-family residence may be exchanged for a motel; vacant land may be exchanged for an office building, etc. There is no limit to the taxpayer’s options.

The properties exchanged by the taxpayer do not have to close at the same time. In most cases, the taxpayer has 180 days after closing on the relinquished property in which to purchase the replacement property.

Two-party exchanges are possible but in reality, such two-party swaps rarely occur. An exchange is usually accomplished with the help of a qualified intermediary and usually involves four principal parties: the taxpayer, the buyer of the relinquished property, the seller of the replacement property, and the qualified intermediary.

If you are considering a tax-free exchange, please contact us to discuss your situation.