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“No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.”
Through a Section 1031 “like-kind” exchange, a taxpayer is allowed to sell one property and buy another without creating a taxable event. A successful exchange results in the taxpayer being able to dispose of a commercial or investment property, then utilize 100% of the equity to acquire one (or more) replacement investment properties, while deferring both capital gains and depreciation recapture that would normally be paid.
To defer payment of capital gains tax, an exchanger should take the following five steps:
- Sell a property held for income or investment purposes. Place sale proceeds in an escrow account with a Qualified Intermediary (facilitator of the 1031 exchange).
- Identify your replacement property(s) within 45 days.
- Purchase a replacement property that is the same or greater value than the relinquished property.
- Reinvest all of the exchanged equity into the replacement property.
- Obtain the same or greater debt on the replacement property and be sure to close on the replacement property within 180 days of sale of the relinquished property.
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