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Tax Free 1031 Exchanges

Certain exchanges of property are not taxable. This means any gain from the exchange is not recognized, and any loss cannot be deducted. Your gain or loss will not be recognized until you sell or otherwise dispose of the property you receive.

Like-Kind Exchanges

The exchange of property for the same kind of property is the most common type of nontaxable exchange. To be a like-kind exchange, the property traded and the property received must be both of the following:

  • Qualifying property
  • Like-kind property

Sec. 1031 Exchange of Property Held for Productive Use or Investment

In explaining nontaxable exchanges, here are the most important things to remember:

  1. Non-recognition of gain or loss from exchanges solely in kind are,

    1. In general:No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.
    2. Exception:This IRS subsection shall not apply to any exchange of:
      1. Stock in trade or other property held primarily for sale
      2. Stock, bonds, or notes
      3. Other securities or evidences of indebtedness or interest
      4. Interests in a partnership
    3. Real Property must be like kind.

      Real property located in the United States and real property located outside the United States are not property of a like kind.

  2. Time limits for identifying and transferring property.

    The following time limits for identifying and transferring the property must be met.

    1. No later than 45 days after the transfer of qualified indications of ownership of the replacement property to the Exchange accommodation titleholder (EAT); you must identify the relinquished property in the manner consistent with the principles for deferred exchanges.
    2. One of the following transfers must take place no later than 180 days after the transfer of qualified indications of ownership of the property to the EAT.
      • The replacement property is transferred to you (either directly or indirectly Through a qualified intermediary, defined earlier under like-kind exchanges Using qualified intermediaries).
      • The relinquished property is transferred to a person other than you or a disqualified person. A disqualified person is either of the following.
      • Your agent at the time of the transaction, his includes a person who has been your employee, attorney, accountant, investment banker or broker, or real estate agent or broker within the 2-year period before the transfer of the relinquished property.
      • A person who is related to you or your agent under the rules discussed in chapter 3 under Nondeductible Loss, substituting “10%” for “50%”.
    3. Exchange accommodation titleholder (EAT) must meet all the following requirements.
      • Hold qualified indications of ownership (defined next) at all times from the date of acquisition of the property is transferred .
      • Be someone other than you or a disqualified person (as defined in 2(b),earlier)
      • Be subject to federal income tax. If the EAT is treated as a partnership or S corporation, more than 90% of its interests or stock must be owned by partners or shareholders who are subject to federal income tax.

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