What Is Section 1031 Of The IRC Code?
December 17, 2009 by Taxcut Editor
Filed under Personal and Business Taxes
Section 1031 of the Internal Revenue Code allows a real estate investor or an owner of an investment property to exchange their property, thus deferring payment of state and federal capital tax gains. This is applicable if they purchase a “like-kind” property that adheres to the regulations and rules of the IRS 1031 exchange. This will allow the investor to use all of the proceeds from the sale to acquire a more valuable real estate holding, diversify into other properties, increase their cash flow, or consolidate into one property to reduce management tasks.
One major point to understand is what qualifies as a 1031 like kind property. The IRS states that in order to qualify, an investor shall incur no loss or gain on the exchange. A few examples of properties that can be exchanged include duplexes, single family residences, commercial properties, apartments and even raw land. For instance, you can exchange an apartment rental for a single family home rental, commercial building, etc.
Under a Section 1031 you also have the benefit of not having to complete the exchange simultaneously, as you have a total of 180 days to complete the entire transaction. But, keep in mind that you only have 45 days after closing on your old property in which to identify your potential replacement property under the 1031 rules.
It is also possible to sell a property under the 1031 exchange property code that has been used for both residential and business purposes. The major requirement is that a clear distinction must be present in the records of the taxpayer, with regard to the property that has been used for business versus the portion that is for personal use. One example of this that would be allowed under the 1031 exchange real estate rules is a bed and breakfast, and using the property as part personal residence and part business property. The same principal applies for the taxpayer who deducts a portion of his or her residence for a home office, as it is considered business usage.
Section 1031 can also be an effective strategy when selling a primary residence that contains excess land around a personal residence, and is used as an investment property. For example, take an owner who has a personal residence that is situated on 25 acres of land, yet it has been determined that the usual and customary acreage for similar properties in the vicinity are on an average only 3 acres in size. If the taxpayer has been holding the 22 excess acreage for investment, then under 1031 exchange rules the excess acres can be exchanged.
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