What are the advantages of a 1031 exchange?
A 1031 exchange provides real estate owners with a range of opportunities to meet personal investment objectives including increased leverage, diversification, improved cash flow, reduction of management obligations, geographic relocation and/or consolidation. The tax dollars saved by an exchange may be maximized to increase an investor's overall net worth. Ultimately, the exchange process allows investors to reorganize and improve their real estate portfolios to best suit their unique interests and needs.
Generally, if you exchange business or investment property solely for business or investment property of a like kind, no gain or loss is recognized under Internal Revenue Code Section 1031. If, as part of the exchange, you also receive other (not like-kind) property or money, gain is recognized to the extent of the other property and money received, but a loss is not recognized.
Section 1031 Exchanges do not apply to exchanges of inventory, stocks, bonds, notes, other securities or evidence of indebtedness, or certain other assets.
Like-Kind Property
Properties are of like kind if they are of the same nature or character, even if they differ in grade or quality. Personal properties of a like class are like-kind properties. However, livestock of different sexes are not like-kind properties. Also, personal property used predominantly in the United States and personal property used predominantly outside the United States are not like-kind properties.
Real properties generally are of like kind, regardless of whether the properties are improved or unimproved. However, real property in the United States and real property outside the United States are not like-kind properties.
