Regardless of whether you’re a business owner, a die-hard entrepreneur, or a realtor that’s been going up the ranks in the industry, chances are that you (and millions of other Americans) are familiar with one term: 1031 exchanges.
1031 exchanges in today’s context
Nowadays, IRS code Section 1031 has come to be one of the most discussed topics in America as it gets passed back and forth in conversations between title companies, realtors, and mothers at coffee shops. In spite of its highly technical nature, Section 1031 has become an important part of conversations in the land of the free— especially when it comes to investment talk.
Now, as common as the topic of the IRS code may be, however, there’s one important fact about Section 1031 that everyone (especially investors) should know of:
- It is important to know each and every moving part that exists within section 1031’s mechanics and how they interact in various situations
- There are quite a few problems with section 1031 as a whole because of its set timeframes and tax implications
- Section 1031 itself stipulates that like-kind properties can only be swapped— which means that its use on vacation properties can be quite limited
Wait, what is IRS code Section 1031 in the first place?
One important aspect to know about Section 1031 when using it in any sentence or trying to apply it is that it’s a whole lot more complicated than simply swapping one item or article for another.
Generally speaking, 1031 exchanges (which are alternatively known as “Starkers” or “Like-kind exchanges”) are a type of transaction in which one investment property is swapped for another. What makes 1031 exchanges—and the entire section itself as a whole—so special, however, lies in the fact that they’re not taxable as sales, effectively leaving you with a minimal or non-existent tax due during the exchange.
What makes Section 1031 so special?
Given the nature of 1031 exchanges themselves, anyone undergoing a transaction that entails its use can change the form of their investment without having to recognize a capital gain or cash out entirely. Exchanges made under the guise of this particular section, as a result, will continue to grow as a tax-deferred property up until the point where you finally sell it.
Another important factor to consider when looking at what makes IRS section 1031 so special is that you can rollover the gain from one real estate investment to another without needing tax because there is no set limit on how often you can do it.
How about depreciable pieces of property?
As opposed to regular cases of properties being exchanged while still having their value intact, moving a piece of investment property according to section 1031 merits following quite a few special considerations.
The IRS has set aside quite a number of guidelines to deal with depreciable properties exchanged in 1031 because doing so can trigger the invocation of a particular type of profit called depreciation recapture. Depreciation recapture, as a whole, takes place if a piece of improved land for unimproved land (such as one with a building for another without)— eventually resulting in the depreciation from the last building being recaptured as standard income.
Applying the potentially-profitable rule of IRS section 1031 during property exchanges is an endeavor that entails taking certain technicalities and viral factors into consideration in order to reap the benefits of a qualified transaction. When used correctly, section 1031 has the potential help any property investor with making moves to rake in more opportunities to swap their current listing (or multiple) for a potentially more attractive and profitable option without having to pay tax!
If you’re looking to learn more about 1031 exchanges, get in touch with us to see how we can help you.