A 1031 exchange, otherwise known as a like-kind exchange is done when a property that is held for productive use in trade or business is exchanged for another property of the “like-kind.” The Internal Revenue Service (IRS) under Section 1031 of the Internal Revenue Code (IRC) allows for these exchanges providing a deferral on the tax of the replacement property until the property is sold making it a huge tool of tax deferral in today’s business world. Florida is a state with growing businesses and any new or growing business should consider like-kind exchanges as part of the tax tools available to them.
What qualifies as a like-kind exchange?
Per Section 1031 of the IRC a property can be like-kind as long as the property is used for a trade or business and is being replaced by another property with the same purpose. For example, if John Smith owns a commercial warehouse, he can sell that warehouse and exchange it for another similar commercial warehouse or exchange the warehouse for a farm that will also be used for some kind of trade or business. The IRC is broad in its qualifications of a 1031 like-kind exchange property and if there is ever a doubt as to whether a property qualifies as a 1031 like-kind exchange, see a tax advisor or tax attorney to help you.
How does a 1031 exchange work in Florida?
In Florida, as in any other state, 1031 exchanges all work the same as it is part of the federal tax code rather than any individual state tax code. At the core, for an individual or a business to use a 1031 exchange to defer all of the capital gains tax from the sale of a property that was used for trade or business purposes, the entirety of the money gained from that sale must be reinvested in a replacement property of equal or greater value. It may seem simple to carry out a like-kind exchange and it can be; however, it is always best to consult a tax attorney or advisor to understand just how a like-kind exchange works and whether a property qualifies for such a exchange or not as to ensure that for federal tax purposes the exchange is done properly.
How does a like-kind exchange deferment work?
At one point the IRS required the exchange to be simultaneous, however, over the years the new regulations allow for non-simultaneous exchanges to occur and qualify under Section 1031. The gains from any particular exchange is then deferred until the new property is sold. However, there are other requirements that must be followed for this to occur. First, the new exchange property must be identified within 45 days of the sale of the original property and second, the replacement property must be acquired within 180 days of selling the original property. For example, if John Smith sells his commercial warehouse on January 1, 2021 he has to identify a new replacement property to exchange the gains from the warehouse by February 15, 2021 and he must acquire that property by June 30, 2021. The exchange being proper in 2021 allows for John Smith to defer the taxes on the gains of the sale of the original property until he sells the replacement property and does not choose to carry out another like-kind exchange at that point.
2 Responses
Hi, I do have a real estate investment for sale for $750,000.00 and my adjusted basis is $180,000.00, under section 1031, I’m planning to buy a property for $400,000.00, my questions are:
1- Can section 1031 still be applied?
2- what amount of capital gain if any I will be required to pay taxes based on this sale?
3- If the property that I’m planning to buy for $400,000.00 requires at least $250,000.00 remodeling, I have to contract with a company to do the remodeling, is this transaction still qualified under 1031? Does the escrow company handle the payment to the contractor directly or the 1031 company?
Two years ago, I sold my property in California as a 1031 exchange. The intent was to mutually purchase a condo with my significant other in Clearwater Florida. Since then, I have maintained a part-time residence in California as a renter while renting my 50% half to Barbara’s LLC business in Virginia – for which she is president.
In your opinion, is this in violation of the 1031 tax rules as it applies to deferring the property gains tax on the sale of my home?