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Whenever you sell investment or business property and you have a gain, you generally have to pay tax on the gain at the time of sale. Internal Revenue Code section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange.
Taxable gains deferred in a like-kind exchange under Section 1031 are tax-deferred, but they are not tax-free.
The theory behind Section 1031 is that when a taxpayer has reinvested the sale proceeds into another property, the monetary gain has not been received in a manner that generates funds to pay any tax.
Thus, the taxpayer's investment is still the same, only the form of the investment has changed (for example, vacant land exchanged for apartment building). It would be a burden to force these taxpayers to pay taxes on a paper gain. This is also why the IRS tries to tax the portion of exchanges where the taxpayer receives any cash or boot in the transaction.
A tax deferred exchange can include like-kind property exclusively or it can include like-kind property along with cash, liabilities and property that are not like-kind. If you receive cash, relief from debt, or property that is not like-kind, however, you may trigger some taxable gain in the year of the exchange. There can be both deferred and recognized gain in the same transaction when a taxpayer exchanges for like-kind property of lesser value.
Taxpayers engaging in deferred exchanges generally use exchange facilitators under exchange agreements pursuant to rules provided in the Income Tax Regulations.
We are exchange facilitators – also called exchange accommodators or more simply trustees – that’s us! We can save you money on taxes and fees.
