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Section
1031 is a provision of the Federal Income Tax Code that
allows companies and individuals to exchange property of a
like-kind without payment of the capital gains taxes due.
The provision has been in the law since March, 1921, and is
well settled. Most* U.S. states
follow Section 1031 with respect to their own capital gains
taxes, however, even the few that do not allow resident
taxpayers to exchange for property out of state will allow
them to do so in-state.
Depending
on the type of property involved, the words "like-kind" are
either loosely or strictly construed: some types of property
do not qualify at all. Loose standards apply to:
REAL
PROPERTY
Real
property is real estate...
-
Located within the 50 US states or Washington, D.C.
(both given and received).
-
Must
be defined as "real property" by your state (e.g. water
rights are real property in some places and personal
property in others).
-
May
be a leasehold interest, if more than 30 years remain.
-
If
outside the US, both the given and received properties
must be such; no US-International cross-border exchanges
are permitted.
If the
property given (your Relinquished
Property) and the property
received (your Replacement
Property) are both real property
under the law of the state in which they are located there
is no further test of similarity.
This
explodes a common myth about real estate exchanges. Namely,
that what you give and what you take must be virtually
identical...
Not So!!
The property given can be
land (in Alaska) and the property received can be a
multi-family on a leased lot (with 30 years remaining) in
Florida. This and
similar exchanges will satisfy the like kind requirement.
Stricter
Standards Apply to Personal Property
In
general, personal property given and personal property
received MUST match a four digit product code found in the
Standard
Industrial Classification Manual
published by the U.S. Department of Commerce.
For
example: If wooden chairs are given, wooden chairs must be
received.
Why would
a law permitting these tax benefits still be on the books?
The short
answer is that it is not in the
public interest for taxpayers to be frozen into their
holdings for tax reasons; it
serves no social good if you have a fair market offer for
your property, which if consummated would lead to growth,
jobs, etc. but which you cannot accept because of all the
taxes that would be due.
Please
review the section in this site entitled
"What
Qualifies" for more information.
*Some
states attempt to impose a state capital gains tax on
non-resident exchanges, however, in many of these states a
withholding waiver is available. |
