The sale of a business or investment asset can create a large tax liability. A properly structured tax deferred exchange under Internal Revenue Code §1031 allows businesses and individuals to defer the recognition of capital gains and other taxes associated with the sale, as long as new assets are purchased to replace the relinquished assets. In general, most 1031 Exchanges are structured as a real property (real estate) exchanges.
To have the benefit of a 1031 Exchange, the property (or business asset) must have been held by the client for productive use in a trade or business, or for investment purposes. The property (or business asset) must also be exchanged for like-kind replacement property that will be held for similar purposes. With few restrictions, exchanges allow businesses and individuals the flexibility to sell and buy property with no significant changes to the terms of the sale and purchase agreements.
By utilizing a 1031 Exchange, clients are able to maximize their capital by deferring the taxes that would otherwise be incurred on an outright sale of their property and use the entire amount of the equity from the 1031 Exchange to acquire substantially more replacement property. Properly structured, a 1031 Exchange becomes an invaluable tax savings and wealth preservation tool.
Investors complete 1031 Exchanges to defer the capital gains tax on the disposition of their investment properties. There are many different types of exchanges that are available to investors, each with their own specific requirements and limitations.