Section 1031 of the Internal Revenue Code may not be well known, but learning more about it can save 25%-30% in capital gains taxes on qualified property. To find out what the section means and who can benefit, we spoke with Banker Exchange’s John Boyd, CEO, and Rachel Landreth, business relations manager.
What does Section 1031 do?
Section 1031 allows the deferral of federal (and often state) capital gains taxes on the exchange of like-kind properties. As a general rule, all real property is potentially like-kind to all other real property.
Who can benefit?
Anyone that will have a gain, and therefore a tax liability, on the disposition of real property can benefit if they meet the requirements and engage a Qualified Intermediary prior to closing.
What are some of those requirements?
Both the relinquished property and the replacement property must be used in a trade or business or held for investment. Strict timelines and administrative requirements must be met as well.
What are some misconceptions about 1031 Exchange?
Certain properties do not qualify for exchange treatment: Principal residences, second homes and property bought for speculation or resale (buy, fix and flip).
People also have questions about meeting the value requirement; exchangers must reinvest all cash received and replace all debt assumed or satisfied on the sale of relinquished property.
It is a complicated topic, but the rewards can be great. Banker Exchange has been a full-time Qualified Intermediary for over 25 years and handles both routine and complex transactions. They put their knowledge and expertise to work on every detail, ensuring that the structure of even the most complex exchange is done properly. As Landreth says, “It never hurts to give us a call and ask about your situation.”
Because as Boyd points out, “A tax dollar deferred is a tax dollar saved.”