WHAT IS SECTION 1031?
Section 1031 of the Internal Revenue Code (IRC) allows an owner of investment property to defer the payment of federal and state capital gain taxes by purchasing “like-kind” property following the rules and regulations of the IRC. Capital gain taxes are typically 15% of the gain, plus 25% recapture of depreciation taken, plus applicable state taxes, which in Iowa are presently 8.98%. (Adding just the federal capital gain tax to the Iowa capital gain tax results in taxes of 24% of the investor's gain. Depreciation recapture can add another significant amount onto the 24%, often pushing the total tax liability well above 30% of the gain.) Section 1031 allows investors to use all of the sale proceeds to leverage into more valuable real estate, increase cash flow, diversify into other properties, reduce management obligations, or consolidate holdings.
WHAT IS “LIKE-KIND” PROPERTY?
The Internal Revenue Code Section 1031 states that “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.” “Like-kind” property can be interpreted broadly as far as real estate goes, provided that the property purchased is held for investment, such as:
- Single-family rental
- Duplex
- Apartment building
- Commercial property
- Raw land
For example, raw land in Iowa can be exchanged for a single family rental in Des Moines, or apartments in Omaha or a commercial building in Missouri. Four single-family rental homes can be exchanged for one apartment building; one office building can be exchanged for two pieces of raw land. Properties can be exchanged anywhere within the United States.
DOES AN EXCHANGE NEED TO BE SIMULTANEOUS?
The old notion of a two-party swap rarely occurs. The vast majority of exchanges are delayed exchanges, whereby the Exchanger has 180 days between the sale of the relinquished property and the closing of the replacement property. The taxpayer must identify the potential replacement property (or properties) within 45 calendar days of closing on the relinquished property.
WHEN IS A SECTION 1031 EXCHANGE APPLICABLE?
It is applicable whenever an individual or an entity sells any property that has been held for investment or for use in business and contemplates purchasing another “like-kind” property within 180 calendar days following the closing of the relinquished property.
[Note: Iowa Equity Exchange cannot give tax and/or legal advice. Every taxpayer should review specific transactions and potential tax consequences with his or her personal tax and/or legal advisor.]
For more information about exchanges, please visit our web site at www.iowaequityexchange.com, or just give us a call.
Ken Tharp
Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.
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