Despite the many changes in the tax law under TCJA, Section 1031 of the IRC Tax Code remained virtually unchanged for real estate gains. This valuable investment tool allows a property owner the ability to sell an investment or business property for a gain but defer tax on that gain and reinvest the entire amount in another property. This scenario can be repeated, and the increased value and tax savings re-invested.
There are very specific requirements for an exchange which can include a “‘deed for deed” swap with another property owner, a deferred exchange utilizing a Qualified Intermediary or a “Reverse Exchange” which allows the acquisition of a replacement property before disposing of your present property. As with all things involving the IRS, the devil is in the details and expert assistance is suggested. Time limits are critical but can allow up to 180 days to accomplish the exchange.
Limitations on 1031 Exchanges:
1. The property must be held for investment or business use.
2. In order to “not create a taxable event” the exchanger must not receive cash from a “sale”.
3. The exchange must be structured prior to close of escrow
4. If the replacement property has a lower value, generally the difference is taxable.