The ultimate guide on 1031 Like-kind exchange
For those who are not familiar with the term, the tax code 1031 is related to real estate exchanges, a domain that allows investors to postpone the taxes they would have to pay for the capital gain on the sale of the property. This is possible through reinvesting the amount of money into another business. 1031 exchanges are quite flexible investment tools for nearly all sorts of commercial real estate investment, so those who are interested in learning even more about this 1031 DST type should definitely read the rest of the article below.
Productive or investment use
When it comes to exchanged properties, they have to be held for certain investment purposes and in case this does not happen, they should be used in a business or trade. You should know that there are some properties that do not qualify for a 1031 like-kind exchange and those are vacation homes, second homes, personal residences, inventory properties, partnerships or any other evidences of interest of indebtedness.
More about like-kind exchange
A like-kind exchange implies for a property to be replaced in a similar character as it happened to a relinquished property and what is more, the former should be held for productive use in certain businesses or trades or for other investment purposes. In order to get a clearer idea upon this matter, you should know some great examples of like-kind exchanges are the replacement property of a shopping centre for an office building, a commercial space for a farm or raw land for a hotel for instance.
It is not necessary for the exchange to be simultaneous
It is important to know that an exchange can be either simultaneous or non-simultaneous. In the latter case, the taxpayer usually uses a well-trained exchange facilitator or intermediary who is supposed to handle the sale process, have all documents and papers in order and facilitate the transaction.
Same name used in taking the title
You should keep in mind that it is recommended for the title present on the replacement property to be the same as the one used on the relinquished property in order to avoid any unpleasant situations from happening. For instance, in case the title of the relinquished property was an LLC, it must be the same one on the title related to the replacement property.
Cost basis calculation
One of the things following 1031 exchange is related to the cost basis in the replacement property, which is going to be the same as the one in the relinquished property. It might happen that you received less money, something that is also known in this domain as “boot”, which might either increase the recognized gain you benefitted from or decrease the recognized loss. “Boot” implies the value you received in the 1031 exchange, such as net debt reduction or even other types of non-like-kind properties, and keep in mind that you should not trade down in order to avoid “boot”. This means that you have to keep an eye on those replacement properties that have equal or greater value compared to the one of the relinquished properties.