Business

1031 like-kind exchanges: A business owner’s take

19 Jun , 2018  

Imagine the following situation: you’ve purchased rental property and struggled to get the rents up, while at the same time keeping the expenses low. Things have worked out great. The rental property is profitable and you’re looking forward to selling it. You swipe your property tax-free in a like-kind exchange. Basically, you don’t pay capital gains tax. Many people don’t know that section 1031 of the IRS addresses real estate investors, as well as businesses. If you need to buy an office building or a business asset, you take advantage of the 1031 exchange and defer the taxes on the sale. Now, isn’t that great? If you would like to find out more, please continue reading.

What kind of property meets the criteria?

What the IRS wants to do is to make sure that the property you’re selling and acquiring is held for productive use. If they discover that you hold the asset for sale, then you’re forced to pay income taxes. When it comes down to like-kind exchanges, you can’t trade a home for a new house. You can, on the other hand, exchange a restaurant for a hotel building. As you can see, the property doesn’t have to be identical. It just has to be like-kind. In other words, the assets have to be of a similar quality. A 1031 investment is stringent and poses restrictions only when it comes to personal property. If the property is going to be used in a business, then there is no problem.

How a 1031 like-kind exchange works

If you want to preserve your capital, then you have no choice but to do a 1031 like-kind exchange. Like-kind exchanges aren’t that complicated. So, how do you avoid capital gains tax and other taxes? Simple. You sell your holding, give the capital gains to a qualified intermediary, identify a replacement asset, negotiate the price with the seller, reach an agreement, and have the qualified intermediary send the money to the  holder of the company. Oh, and complete the IRS form. Although it seems complicated, it isn’t.  If you think that you can’t get by on your own, then seek help. There are many experts out there willing to help you.

Plan ahead of time

Your ability to run the business transaction smoothly is essential. Start planning ahead of time. The asset that is going to be sold needs to be held for at least 1 year and a day. If you’ve has the property for less than that, you can’t make the exchange. The IRS makes it pretty simple for you to avoid paying capital gains tax, but still. There are some challenges that you have to overcome. Pay close attention when investing in another property. If you sold your belonging for a million dollars, then you have to invest a million dollars. You don’t have to buy just one property. You can reinvest the money in 3 assets as long as their total value doesn’t surpass one million dollars. Take your time and don’t rush the process.


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