Under Internal Revenue Code (IRC) Section 1031, a taxpayer may be able to defer capital gains taxes on certain qualifying property if he or she finds a ‘like kind’ replacement. If you are selling investment property, income-producing real estate, or business property for a net gain, you qualify for a Section 1031 exchange. Here, our top-rated Dallas real estate finance lawyers answer some of the most commonly asked questions about Section 1031 tax deferred exchanges.
What is a Section 1031 Exchange?
A Section 1031 exchange allows taxpayers to dispose of certain real property and exchange it for other so-called ‘like kind” property. In doing so, the taxpayer can defer federal capital gains tax liability.
As an example, imagine that a commercial real estate investor purchased a property for $500,000. Five years later, the investor wants to sell the property for $750,000. With a straightforward sale, that investor would be forced to recognize the $250,000 gain, and then pay capital gains taxes.
However, through a Section 1031 exchange, the investor could potentially obtain a ‘like kind’ replacement property. When done properly in accordance with IRS regulations, this exchange will allow the taxpayer to defer that capital gains tax liability. This is the primary benefit of a Section 1031 exchange.
Are There Any Drawbacks to Doing a 1031 Tax Deferred Exchange?
Depending on your specific circumstances, a Section 1031 tax deferred exchange may simply not be advisable. Most notably, if you suffered an actual loss on real property, you would almost certainly want to recognize that loss on your taxes. If you are considering the viability of a Section 1031 exchange, you should consult with an experienced Dallas, TX commercial real estate lawyer.
Can Any Property be Exchanged Under Section 1031?
No. There are limits on what property qualifies for an exchange under Section 1031. Specifically, the property in question must not be used for primarily residential or personal purposes. In other words, investment property, income-producing property, and business property are the type of property that can qualify for a Section 1031 exchange.
How Long do I Have to Act?
Under Internal Revenue Service’s regulations, Section 1031 exchanges are subject to strict deadlines. Replacement property must be identified with 45 days and the exchange itself (the actual purchase of real property) must be finalized in 180 days. If you fail to take action without the appropriate deadlines, your exchange is unlikely to be allowed. For this and other reasons, it is crucial that you speak to a lawyer as soon as possible.
Did the 2017 Tax Reform Bill Impact Section 1031?
Yes. Prior the passage of the Tax Cuts and Jobs Act of 2017, most property qualified for potential tax deferred treatment under Section 1031. This is no longer true. The law has been reformed to limit Section 1031 to real property (real estate).
Get Help from a Dallas Commercial Real Estate Transactions Lawyer Today
At Bennett, Weston, LaJone & Turner, P.C., our real estate finance lawyers have extensive experience handling deferred like-kind exchanges under Section 1031. We are prepared to help you, or your business protect your legal rights and financial interests. To set up a confidential consultation, please do not hesitate to call our Dallas law office today at (214) 691-1776 or toll-free at (888) 991-1776.