Internal Revenue Code Section 1031 Exchanges
A "Section 1031 Exchange" refers to a transaction where the taxpayer exchanges property used ONLY for business/investment purposes for property of a "like-kind". The advantage of a so-called "Section 1031 Exchange" is that the the capital gains tax on any profit made from the sale of the first property is deferred up to the amount of the proceeds of the sale of the first property that are used to purchase the second property.
However, if as part of the exchange, the taxpayer receives not only "like-kind property" but other property or money, the additional property or money will be considered a taxable gain.
Importantly, a transaction involving solely inventory, stocks, bonds, notes, other securities or evidence of indebtedness, or certain other assets (See I.R.C. s. 1031 at www.irs.gov) are NEVER going to be viewed by the I.R.S. as "like-kind" exchanges.
What is a "like-kind" property?
A "like-kind" property is a property that is of the same nature or character even if said property differs in quality or grade. A taxpayer's personal property of the same class is "like-kind". Parcels of real estate are generally considered to be "like-kind" with some exceptions.
What is property of the "same class"?
This is an area of the law where legal research by a qualified attorney can prove quite beneficial. For example, different sexes of livestock are NOT considered to be of the "same class" by the I.R.S. Also, an exchange of real property within the borders of the U.S. for real property outside the U.S. will not be considered of the same class and, thus, not a "like-kind" exchange.
How can I find out more?
To learn more about Section 1031 Exchanges, you can visit the official website for the Internal Revenue Service at: www.irs.gov or consult with a qualified attorney.
The IRS form to fill out for a Section 1031 Exchange for tax year 2007 can be found at this link: http://www.irs.gov/pub/irs-pdf/f8824.pdf. The form includes instructions that can be useful to review.
Certain deadlines must be adhered to in order to have a transaction qualify, if you wish to perform a Section 1031 Exchange it is advisable to consult with a qualified attorney as soon as possible.