Real estate transaction activity is picking up, especially in the attractive markets of Phoenix and Tucson, Arizona (AZ). That means business owners and investors looking to sell real estate are increasingly considering the tax advantages of 1031 like-kind exchanges.
What Is a 1031 Like-Kind Exchange?
Generally, when you sell business or investment property and you have a gain, you must pay tax on the gain at the time of the sale. IRC Section 1031 provides an exception. No gain or loss is recognized, and therefore tax is deferred, on the exchange of property that meets the following tests:
- The transaction is a reciprocal transfer of property (aka, exchange)
- The property is exchanged solely for property of the same class (aka, like kind)
- Both the property transferred and the property received are held for investment or for productive use in trade or business (not primarily for sale)
- The property is not stock, securities, inventory, partnership interests or choses in action
If they follow these rules, businesses and individuals have a considerable amount of flexibility in exchanging real property while deferring taxes. That is because the U.S. and state governments want to encourage businesses to grow and increase their production, and they recognize that taking out cash to pay taxes stifles such growth.
Did you know…
In certain states, taxpayers cannot conduct a like-kind exchange of a mail cow for a female cow, but almost any real estate can be exchanged for any other real estate (such as rental property and vacant land).
Selecting the Right Accounting Firm
The potential to defer gains, and therefore capital gains tax, makes 1031 exchanges a valuable way to free up cash flow while building your real estate portfolio or production capacity. However, unwary real estate owners can make simple mistakes that can derail the exchange, such as failing to close on the replacement property within 180 days.
Large real estate transactions involve complex calculations that require a deep understanding of the nuances of real estate taxation. Issues such as partnership interest, taxable “boot” and proper accounting treatment of property depreciation can trip up less experienced accounting firms.
BeachFleischman PC has been structuring 1031 exchanges throughout the country for more than 15 years, and we stay informed of the latest regulatory and case law developments through annual real estate conferences. In addition to helping our clients achieve their tax-minimization goals, our expertise and thorough documentation means that our 1031 exchanges stand up under IRS audit.
Whether you are a business owner looking to upgrade to a larger warehouse or office building, or you are a real estate investor seeking to build your portfolio of rental real estate without dipping into your coffers to pay capital gains tax, contact our qualified 1031 exchange tax professionals to explore whether a like-kind exchange will accomplish your goals.
If you are looking to conduct a tax-deferred exchange of real estate, or if you have any questions about whether a 1031 like-kind exchange is right for your situation, please contact us via the submission form below.