1031 Tax Exhange

A 1031 tax free exchange is a way for owners of business or investment real estate to sell their property and buy other like kind property without paying any capital gains tax.

Trading or exchanging property had been done for many years but untl 1990 there were no clear IRS rules on how those transactions would be taxed. In the summer of 1990 the I.R.S. finally came out with the long awaited rules on Deferred Exchanges. Section 1.1031 of the Internal Revenue Code laid out in detail the procedure for turning a sale and purchase type transaction into an exchange.

  • These new rules allowed the owners of business and investment real estate to buy and sell their property on the open market, and by following these simple rules defer the payment of the capital gains tax.
  • The rules require that the property must be of “like kind” however the like kind provision for real property is quite broad. It includes land, rental, and business property, any of which, can be exchanged for the other.
  • The rules also require that the "Exchanger" use a safe harbor to hold the proceeds while the exchange was in progress, and spells out what those safe harbors are.
  • The only practical safe harbor for most "Exchangers" is a "Qualified Intermediary."