IRC 1031 Code
The Internal Revenue Code 1031 (IRC 1031) property exchange refers to the process of allowing an investor or property owner to exchange a property for another property as a way to defer payment of state and federal capital gain taxes. Of course there are other components of the code, including the type of properties that qualify and the amount of time allowed in which to complete the entire transaction, in order for the IRS 1031 exchange to be approved.
A 1031 like kind exchange is not really an avoidance of tax; it is more of a rollover of equity of like properties so that you can continue to build wealth through investing in real estate. Ever since 1921 there has been an exception in the Capital Gains tax code that states the tax can be deferred if the investment property is not sold but exchanged instead.
The major concept of the IRC 1031 is for a taxpayer to be able to relinquish an investment or income property and obtain a like kind replacement investment or income property without worrying about paying a large capital gains tax after a sale. There are some helpful tips and basic rules that are good to know but in essence the 1031 rules have really changed very little since 1921.
This tax deferred 1031 exchange is much more than just selling an investment property, such as a rental house, and then turning around and buying another rental property. There are some very creative possibilities with this code. Perhaps you should consider purchasing a property in the area where your child is going to attend college, holding it as a rental, and then completing a 1031 exchange after they have graduated. Many investors are leery of selling a property after making a substantial gain in the market, so opting for a 1031 property exchange would allow them to exchange a residential property for office or business rentals.
At some point the real estate investor will likely find themselves ready to slow down, cash out and possibly retire, and no matter what type of property they own, such as apartment complexes, a rental house, business offices, warehouses or land they can use the IRC 1031 property exchange to find a replacement property. This property may be a nice residential home located at a golf resort or on the beach front where they may choose to retire; in order to qualify as an exchange the property has to be used for investment purposes. In order to fulfill this requirement many investors will use the property as a rental and then later use it as a conversion, meaning that a few years after the original 1031 property exchange, they can simply move into the property without having to pay the normal taxes.
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