Section 1031 exchanges are based on a 100 year old Internal Revenue code which states: 

"No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment."  - U.S. Code 26, Section 1031

Put simply, if a piece of qualifying real estate is used for business, trade or investment purposes, and meets the guidelines and definitions of such items as defined by the IRS, owners may exchange it for like-kind real estate while deferring capital gains, so long as the property acquired qualifies and continues to be held for use as an investment, or in a trade or business.

There are many situations in which 1031 exchanges can be used:

  • when the client gives up a single property and wishes to acquire several properties.
  • when the client gives up several properties and wishes to acquire a single property.
  • when the client owns a joint or fractional interest in property and wishes to go to full interest in that (or another property)
  • permitted to be used by individuals, trusts, partnerships and corporations for the exchange of that person's or entity's assets for other qualifying assets to be held by the same person or entity.
  • can be used for the exchange of such things as remainder, timber, water or mineral interests, or certain leaseholds.
  • easily understood by laymen.

On the contrary, there are clear situations when 1031 exchanges cannot be employed:

  • for personal or vacation homes unless these properties are first rented out to others.
  • a process where someone with property desired by the client must be found to take client's property, all at the same values and debt levels (a near impossibility).
  • limited by the size, value, degree of improvement or debt levels of either property.
  • a process where cash for unqualified purposes can be extracted from the transaction.
  • suitable for disposing of ownership interests in any trust, partnership, or corporation.
  • suitable for disposing of good will or "going concern value" in businesses.
  • allowed by IRS if qualified replacement property is not designated by the client within 45 days of the date of transfer of the client's property.
  • allowed by IRS if not completed within 180 days (as adjust­ed) of the date of transfer of the client's property.
  • a tax-code provision to be taken lightly; however, if this provision is properly applied, it can save your client a great deal of money in deferred income taxes.

Given the complexity and specific requirements of section 1031 Tax-Deferred Exchanges, discussing your specific situation with an experienced and Certified (1031) Exchange Consultant (CEC)  isn't just the best way to find out if it's the right move for you...it's the only way.