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The 1031 Like-Kind Tax Deferred Exchange: What it Is, What it Is Not and More!

What is a Tax-Deferred Exchange? A 1031 tax-deferred exchange (from Section 1031 of the IRS tax code) is a method by which a property owner may trade one property for another without having to pay federal income taxes on the transaction.
Here are my top three reasons why you might want to consider using an exchange.

  1. Deferral of Taxes - A 1031 Exchange allows you to sell your investment property and reinvest in a replacement property to defer capital gains taxes. 
  2. Relief from Management – You can exchange a high-maintenance and intensive-management property i.e. a large multi-family complex to a single-family lake front rental with great cash flow, low maintenance, and low management required.
  3. Improve Cash Flow - Sell a low- or no income producing property for a higher income/appreciation property.

    Traditionally, a 1031 exchange is where one property is swapped for another property of “like-kind.” In an ordinary sales transaction, the property owner is taxed on any gain realized by the sale of the property. In an exchange, some, or all, of the tax on the transaction is deferred until sometime in the future, usually until the newly acquired property is sold.

    In an exchange, a property owner simply transfers an old property and receives a new property. There are many IRS rules that one must follow to ensure the exchange complies. While it might seem like semantics, an exchange is an exchange and not a sale.
What it Is and What it Is Not.

Like-kind exchanges assist the recycling of real estate and other capital to its highest
and best use in the marketplace, creating value and improving economic conditions
for local communities throughout. Many taxpayers would be harmed if they had to pay taxes for moving their investment or reinvesting their business assets. Section 1031 meets the current tax reform goals perfectly. The 1031 Exchange is a simple and sound tax policy that has been stimulating economic growth since its inception in 1921. It is not a loophole and ought to be retained.

According to 1031 Exchange expert Bill Horan, “a taxpayer is deemed to have sold property in a taxable transaction if ‘the rights and interests in the property are conveyed and the taxpayer is in actual or constructive receipt of the proceeds.’ Consequently, a taxpayer who transfers title to property to the buyer and walks the proceeds across the street to purchase the new property has sold property in a taxable transaction and will not be afforded the benefits of an exchange.”

The taxpayer may avoid the taxable sale and purchase and qualify for exchange
treatment if, prior to the sale of the old property, the taxpayer enters into an 
exchange agreement with a qualified Intermediary. Also, known as an “accommodator,” a qualified intermediary is a company that facilitates Internal 1031 tax-deferred exchanges.

Are you Interested?

If so, this is where you need to understand that a 1031 exchange is incredibly complicated, even for career investors. Before you start consult your real estate, tax, accounting and/or legal professional before initiating a 1031 Tax Deferred Exchange and/or consult the experts in 1031 practice. Even a small mistake can jeopardize the deferment of your capital gains taxes, which is why most investors seek professional help.

For More Information:

  • One way you can help yourself and your clients in understanding and using the 1031 Exchange is by attending continuing education classes offered by the Realtors ® Commercial Alliance of MA which have 1031 experts teaching these classes. For information on joining the RCA-MA contact Colleen Pappas, EVP Realtors® Commercial Alliance of MA 492 Washington Street, Auburn MA 01501 Tel. 508-832-6600 Ext. 2 or go to
  • RCA-MA affiliate, the Exchange Authority, 9 Leominster Connector, Leominster MA 01453 Tel. 978-433-6061.