1031 Exchange Menu

Internal Revenue Code Section 1031 is a powerful tool for deferring capital gains tax on commercial/investment transactions. It allows taxpayers to exchange real or personal property for new "like-kind" property, while deferring recognition of any capital gains

The flip side of a typical forward exchange, a reverse exchange allows you to buy your replacement property prior to selling your relinquished property. Reverse exchanges are more complex and require careful structuring
Non Safe Harbor Reverses. The IRS issued safe harbor that allows reverse exchanges limited the time frame to 180 days. Any reverese outside of 180 days requires carefull structuring to avoid a successful challenge by the IRS that the party who initially took title to the parked party was the taxpayer's agent. The US Tax Court, however, recently held in favor of a taxpayer whose reverse exchange ran outside of the safe harbor. See Estate of Bartell, 147 T.C. No. 5 (2016).

A construction exchange provides you with the opportunity to build your own replacement property. Construction exchanges can be done in conjunction with a typical forward exchange, or as part of a reverse exchange. Construction exchanges require careful structuring.

A personal property 1031 Exchange allows an individual, small business or institutional taxpayer to sell existing personal property (relinquished property) and purchase more profitable and/or productive personal property (like-kind replacement property) while deferring Federal, and in most cases state, depreciation recapture and capital gain income taxes.
Taxpayers often view personal property as assets that do not appreciate in value and therefore have no taxable gain to worry about. However, personal property held for investment or used in a trade or business is typically depreciated for book value purposes and thereby creates a taxable gain upon sale for book and tax purposes. This gain can be deferred using the personal property 1031 Exchange.

Tenant in Common is a form of holding title to real property. It allows the owner/owners to own an undivided fractional interest in the entire property. In addition, it has become the preferred investment vehicle for real property investors who wish to defer capital gains via a 1031 exchange and own real property without the management headaches.

Most of these exchange issues require careful analysis and planning in order to qualify as a tax free exchange.
Zero Equity. Qualifying for like-kind exchange treatment becomes more complicated if the property exchanged is “underwater”—that is, the debt on the property exceeds its fair market value (FMV). The taxpayer will receive no proceeds (other than relief from indebtedness) from the disposition of the property to reinvest in like-kind property. The IRS has ruled that a taxpayer can use the like-kind exchange rules of Sec. 1031 to defer the gain realized on the transfer of underwater property to the lender in satisfaction of a nonrecourse debt. Additional analysis may be required if the liability is recourse.
Partnership Exchanges. When a partnership is selling property and some of the partners want to cash out and others want to reinvest, it can create complications with a 1031 exchange.