1031 Exchanges – When Do They Really Apply?

Nov 14, 2019 | Featured, Tax

Cory Lee – JD, LLM

It is likely that you have heard of a 1031 Exchange, whether it was part of an investment opportunity or when you sold you personal home, it seems that everyone has at the very least heard of 1031 Exchanges.  But what exactly is a 1031 Exchange and when can they be used?  It is surprising how often this topic comes up, but even more surprising, is how often this topic come up in a context to which the 1031 Exchange is not even applicable.

To begin with, a 1031 Exchange is named after Internal Revenue Code Section 1031, in which the IRS permits taxpayers to defer the payment of taxes on certain transactions.  At a high-level, in order to qualify for a 1031 Exchange, a taxpayer must be selling real property that has been held for business or investment purposes and the proceeds from the sale must be used to purchase “like-kind” property.  In most cases, the purchase of other real property will satisfy the like-kind requirement of Section 1031, this is why 1031 Exchanges are also referred to as “Like-Kind Exchanges.”  In addition to the property being held for business or investment purposes, the purchased property must be identified within 45 days of the property being sold, and the purchase must close within 180 days of the property being sold.

1031 Exchanges are not applicable to the sale of your personal residence and likely do not apply to the sale of your vacation home or second home.  The Internal Revenue Code does provide for the exclusion of gain on the sale of your personal residence subject to certain limitations and requirement.  (See IRC § 121). The other item to keep in mind is that a 1031 Exchange does not relieve you of the obligation to pay tax on the gain of the sale of business or investment property, it is simply a tax deferral tool (although there are potential ways of eliminating the deferred taxes altogether not covered in this article).

1031 Exchanges are very common transactions but also have very specific requirements that must be satisfied in order to qualify for the tax deferral, failure to satisfy the requirements can trigger the payment of taxes much earlier than anticipated plus the potential for penalties and interest.  In order to comply with the requirements of Section 1031 please consult with a professional prior to engaging in a transaction that may qualify for tax-deferral to make sure all requirements are met and to minimize your risk of having a 1031 Exchange disqualified by the IRS.

Cory received his LLM in Taxation from the University of Florida and specializes in tax planning and tax controversy.  If you would like Cory to present on 1031 Exchanges or other tax related issues please contact the law office of JensenBayles, LLP at (435) 674-9718. The information in this article is for educational purposes only and is not intended to be construed as legal advice. Please contact an attorney for legal advice specific to your situation.

Proven Law

Why Choose Us?

Free 30 Minute Consultations

Voted Best Of Southern Utah For 4 Years In A Row

150+ 5 Star Google Reviews

95+ Years Of Combined Experience On Our Team

We Only Focus On Estate, Trust, And Tax Matters

Call us

(435) 688-9231