What is IRC Section 1031?
Whenever you sell business or investment property and you have a gain, you generally have to pay tax on the gain at the time of sale. Internal Revenue Code (IRC) 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. Gain deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax free.
The 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 debit, 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.
To accomplish a Section 1031 exchange, there must be an exchange of properties. The simplest type of Section 1031 exchange is a simultaneous swap of one property for another. Deferred exchanges are more complex, but allow flexibility. They allow you to dispose of property and subsequently acquire one or more other like-kind replacement properties.
Who Qualifies for the Section 1031 Exchange?
Owners of investment and business property may qualify for a Section 1031 deferral. Individuals, C Corporations, S Corporations, partnerships (general or limited), limited liability companies, trusts, and any other taxpaying entity may set up an exchange of business or investment properties for business or investment properties under Section 1031.
Qualified Intermediary Services
First National Bank provides Qualified Intermediary Services to assist business customers with Section 1031 exchanges. Serving in this role means that First National Bank will help facilitate funds for the sale and purchase of property within the exchange. First National Bank works closely with attorneys in this process to ensure all activity adheres to the law.
Learn more about our services.
Speak with one of our specialists before considering a Section 1031 exchange. Call 515-663-3037 for assistance or email one of our specialists.
The information on this page is not intended to constitute legal, financial or tax advice and should not be used in lieu of any professional's advice.
Please be aware that there are time limits to complete a Section 1031 Deferred Like-Kind Exchange or the entire gain will be taxable.
It is also important to know that taking control of cash or other proceeds before the exchange is complete may disqualify the entire transaction from like-kind exchange and make all gain immediately taxable. One way to avoid premature receipt of cash or other proceeds is to use a qualified intermediary or other exchange facilitator to hold those proceeds until the exchange is complete. You cannot act as your own facilitator. In addition, your agent (including your real estate agent or broker, investment banker or broker, accountant, attorney, employee or anyone who has worked for you in those capacities within the previous two years) cannot act as your facilitator. Be careful in selection of a qualified intermediary.