This year I had the unpleasant experience of finding out a couple of our clients did 1031 exchanges that did not qualify for the tax deferral. To my surprise I found out I was not the go to for tax information, but their realtor, tennis companion, or the guy at the water fountain were the experts. I thought it would be best if I put some general information out about this tax transaction. This information here is not to be inclusive of all the issues but is to alert the reader to the complexities and cost of doing a simple exchange of one property for another without having to pay tax.
The first item that must be addressed is the property of like kind. Property sold (relinquished property) must have been held for productive use in a trade or business or investment. Personal use property like your residence or second home not rented will not qualify. The property received (replacement property) must be held for productive use in a trade or business or held for investment purposes. Foreign property is not like kind to US property.
The second item to consider is the Replacement Property of a higher value than the Relinquished Property. This is necessary to get full deferral of income tax.
If both of those items are positive, then a 1031 exchange may be right for you.
There are many variations on the 1031 exchange requiring additional agreements. These complications such as reverse 1031 exchange and building the replacement properties need expert tax advice and should only be done with proper planning.
Please contact us with any questions regarding the above and any other tax issues you may have.