1031 Tax Exchange Information


IRC Section 1031

Often investors do not realize taxation on a personal residence is far different than taxation on income or investment property. The Taxpayer Relief Act of 1997 changed Internal Revenue code treatment for the sale of a personal residence to allow a single taxpayer a $250,000 exclusion from capital gain. Married couples receive a $500,000 exclusion. The taxpayer must have resided in the property two of the last five years. This exemption may be used once every two years.

If an investor sells property they pay tax. However, property that qualifies for preferential tax treatment under Internal Revenue code Section 1031 is treated quite differently. IRC Section 1031 States: "No gain or loss shall be recognized if property held for productive use in a trade or business or for investment purposes is exchanged solely for property of a like-kind."

Therefore, an investor using IRC Section 1031 can exchange raw land for a rental home, an apartment complex for a shopping center or rental houses for an office building. The use of the property is the factor in determining the tax treatment.

The code has remained substantially unchanged for the past 50 years and was clarified with Treasury Regulations in 1991. The Regulations redefined the "Starker" or delayed exchange, including the 45-day identification requirements for replacement property. These Regulations also encourage the use of a Qualified Intermediary, deeming them a "safe harbor." A "safe harbor" is a term that defines acceptable guidelines so a transaction will be regarded defensible.

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