1031 Exchange Laws

The United States code for 1031 exchange of property is a somewhat simple procedure. However, there are strict laws that apply to this type of transaction so it is crucial that it is well understood by all parties. What the exchange law is, simply, is an exchange of like kind property. Within this exchange, no gain or loss is recognized. Each property is held for use in a trade, business or investment in a productive manner.

There are exceptions to the and the exchange laws do not apply to the exchange of stock in trade , stocks, bonds or notes, or any other property that is held primarily for sale. They do not apply to other securities or evidence of indebtedness or interest. Also not eligible are interests in a partnership, certificates of trust of beneficial interests.

The next section of the 1031 exchange laws states that the property must be identified and that the exchange must be completed a maximum of 180 days after the transfer of the exchange property.

There are other sections that apply to the 1031 exchange and these sections drive the basis of how property is exchanged. Sections 1035, 1036 and 1037 have sections that deal directly with this portion of the transaction.

There are special rules for exchanges that occur between people who are related. If a taxpayer exchanges property with a related person, the gain or loss is not recognized or if less than 2 years after the date of the last transfer that was a part of the exchange the person who is related disposes of the property or the taxpayer disposes of the property that was received in the exchange, then there is no nonrecognition of gain or loss.

It should be noted that real property that is located in the United States and real property that is located outside of the United States is not like kind property. Additionally, personal property that is used mainly inside the United States is not like kind property to personal property that is used mainly outside the United States.

Predominant use is defined in the U.S. Code of the 1031 section as a property's predominant use is determined based on specific criteria. In regards to the property that is relinquished in the exchange, it is the 2 year period that ends of the date of the relinquishment and the property that is acquired has an evaluation period that extends the 2 years that begins on the date of the acquisition.

There are other aspects of the 1031 laws and the best thing to do is to review the entire code or speak with an attorney to gain a full understanding of the laws. Even a slight misinterpretation on your part could result in the transaction being invalid or in your making poor choices. Get the facts first and obtain a clear understanding of the entire process before you put your money on the line.

1031 Tax |