Section 1031 Exchange Laws Explained
The section 1031 exchange is often used to assist a business or person in obtaining useful property while relinquishing useful property already owned and deferring the taxation of that relinquished property so that all of the funds can go into obtaining the replacement property. This process is outline clearly in the IRS law book, under section 1031. The section 1031 exchange law is often called the like kind law because of the specifications in the law requiring all property exchanges to be of like kind. The section 1031 property exchange law does not eliminate taxes, but rather postpones these taxes until a later date or indefinitely.
The section 1031 exchange law states that no gain or loss shall be recognized in the exchange of one property for another like kind property. This means that the first property can be sold and no profit posted provided the purchase of the replacement property requires the money from that initial purchase. This also is to mean that the properties must be of the same type, though not of the same value. It is generally assumed that the value of the initial property is equal or less than the value of the replacement property.
The like kind trade as defined in the section 1031 property exchange law is to mean that the properties must be of the same type. For example, cattle can be exchanged for more or different cattle. A building can be exchanged for a different type of building but not for cattle. A vehicle can be exchanged for another vehicle, but cannot be used in exchange for real estate. This helps to guarantee that the values are true and that the IRS is not being fed incorrect information regarding the taxes being deferred.
It should be noted that while it is more common for one property to be exchanged for another property, under the section 1031 exchange laws, multiple properties can be exchanged for one and one can be exchanged for multiples. This exchanging of property also does not and usually is not between two individuals with each giving and receiving property from the other. It is more typical for one person to engage in the purchase and selling of property under the section 1031 exchange laws and the others to be simply selling or buying, or engaging in section 1031 exchange laws with others as well.
There are specified time limits in the section 1031 exchange law that a company or individual must meet in order to qualify for the tax deferral. These time limits are not limits on when the exchanges can occur, but over the length of time one has to complete the exchange. 45 days is the length of time that the IRS gives for a company or individual to purchase new property after the relinquishment of the initial property. An extension can be filed by the 45 day, and then the person or company has until the 180th day from the start of the section 1031 exchange to complete the purchase.
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