Buying & Selling with Section 1031: An Overview of Tax-Deferred "Like-Kind" Exchanges
By Erika M. Cave, CPA
Do you own a rental property that has appreciated and you’d like to buy more rental properties? Do you own a retail or commercial property that is no longer serving your needs? Would you like to use 100% of the sale proceeds to purchase a new investment property instead of paying a portion in capital gain taxes? Of course, the answer to that last question is a resounding YES, so a Section 1031 Tax-Deferred “Like-Kind” Exchange may be something to consider.
While this code section can certainly get complicated, the general concept is simple: sell an existing property and buy a new property with the gain or profit from the sale without immediately paying any taxes. The new property or properties are considered a continuation of your original investment. This allows you to make business decisions today without the impediment of negative tax consequences in the current year. Note that you are not avoiding taxes altogether, just deferring them to the future when you decide to sell the new property outside a like-kind exchange.
What is considered “like-kind” property? “Like-kind” refers to the type or character of the property, not its state or quality. So, you can sell a residential rental house and purchase vacant land, or you can sell farm land for a commercial building. Property that doesn’t qualify includes personal property like a primary residence or vacation home, or exchanging real property in the United States for real property outside the United States.
Section 1031 exchanges are not just for huge corporations or professional investors. Any taxpaying entity can utilize this strategy, including individuals, C corporations, S corporations, partnerships (general or limited), limited liability companies, and trusts.
The recent Tax Cuts and Jobs Act has not changed the tax code for like-kind exchanges of real estate; but starting January 1, 2018, all personal property assets, (i.e. autos, trucks, heavy equipment, farm machinery, aircraft, artwork, coin collections and other collectibles, and intangibles like fast-food restaurant franchise licenses), no longer qualify for Section 1031 tax-deferral treatment. However, machinery, equipment and autos may now be eligible for immediate 100% expensing for the next five years.
If you have any questions or think you could take advantage of a Section 1031 exchange, consult your tax professional at Sink, Gordon & Associates, LLP. We would be glad to help you understand how a like-kind exchange may apply to your situation.
Erika Cave, CPA | EMAIL
Erika joined Sink, Gordon and Associates LLP in 2013. She graduated in 2002 with her Bachelor of Arts degree from Wartburg College in 2002. She then furthered her education by earning her Master of Music degree in 2004 from the University of North Carolina at Greensboro. Erika went on to obtain her Master of Accountancy degree from Stetson University in 2011. Prior to her work with SGA, she gained eight years of accountancy experience and lived in a variety of communities prior to Manhattan due to her husband’s active military service. She advises clients in a number of areas including