What is section 1031?

Section 1031 of the IRS code slowly creeps into everyday conversation. The term refers to real estate agents, bond companies, investors and football mothers. 

Section 1031 of the IRS contains many moving parts that the user must understand before attempting to use it. There are also tax implications and periods that can be problematic. In addition, the rule sets the properties of the 1031 exchange rate and limits the use of the law with vacation properties.

What is section 1031?

In general, a 1031 exchange (also called a similar transaction or Starker) is a real estate investment exchange with another. Although most swaps are subject to sales tax, if you meet the requirements of resolution 1031, you will not have any taxes or fees on the exchange.

In fact, you can change the form of your investment without (as the IRS sees it) collecting or recognizing a capital gains. This enables your investment the opportunity to continue to grow with deferred taxes. There is no boundary to the number of times or how many times you can earn 1031. You can transfer the profit from one real estate investment to another, to another and to another. Even if you can profit from each trade, avoid taxes until you sell for cash several years later. You are therefore expected to pay only a fee and a long-term capital gain rate (currently 15% or 20%, depending on income and 0% for some low-income taxpayers).

The provision is only for investments and commercial properties, so it is not possible to change your principal residence from another home. 

Special rules for depreciable assets

Warning: Special rules take effect when a depreciable property is replaced by 1031. This may result in a gain called a depreciation recapture, which is taxed as ordinary income. Generally, if you swap one building to another, you can prevent this recapture. But if you replace an improved land with a building with unimproved land, without a building, the previously requested depreciation in the building will be recovered as ordinary income.

These complications are the reason why you needed the help of a professional when you performed in 1031. However, if you are thinking of buying a 1031 or are just curious, here are some things to know.

Amendments to Rule 1031

Prior to the approval of the new tax legislation of December 22, 2017, specific changes in personal assets, such as franchise licenses, aircraft and equipment, were eligible for 1031 exchange. Under the new law, only buildings are available. Scholarships or corporate interests have never qualified and have not been.

In contrast, interest as a co-tenant (ICT) in real estate continues to apply. It should also be remarked that the allocation of total tax expenditures and the reduction in employment (TCJA) to certain tangible personal assets can help offset this change through tax legislation.

The TCJA includes a transition rule that allows for a qualified exchange of personal property in 2019, if the initial property was sold or the replacement property purchased before December 31, 2018. The transition rule is distinct to the taxpayer and does not permit the reverse exchange 1031 if a new property is purchased before selling the previous ownership. 

Like-Kind is broad-based

Most exchanges should simply be "similar", an encrypted phrase that does not mean what you think it means. You can exchange a building into rough terrain or a ranch with a mall. The rules are surprisingly liberal. You can even exchange one company to another. But again, there are pitfalls for non-observers.

You can do a "late" exchange

Traditionally, a transaction involves a simple exchange of one property with another between two people. But the chances of finding someone with the exact property that you want precisely the property you have is rare. For this reason, most exchanges are delayed, tripartite or "Starker" (called by the first tax case that allowed them).

In a late exchange, you need a qualified broker who has the money after "selling" your property and using it to "buy" the replacement property for you. This tripartite exchange is treated as an exchange.

Regulation 1031

There are two essential rules you must follow in a late exchange.

• The first concern of the designation of a replacement property. Once your property is sold, the intermediary will receive the money. It is not possible to earn money or damage to the 1031 treatment. In addition, within 45 days of the sale of the property, you must hand over the replaced property to the intermediary stating the property you want to buy. The IRS claims that it can assign three properties as long as one is closed. You can designate more than three if you submit to specific evaluation tests.
• The second time rule in a late transaction is related to the closing. The newly acquired property must be closed within 180 days of the previous sale. Note that both periods run simultaneously. This means that you start counting when the sale of your property is closed. If you assign a replacement property exactly 45 days later, you have only 135 days to close the replacement property.

Tax implications and mortgages

There may be money once the broker has bought the replacement property. In this case, the intermediary will pay you at the end of the 180 days. This money, called startup, will be taxed as a partial income from the sale of your property, usually as a capital gain.

One of the main ways people treat these transactions is to ignore loans. You must consider mortgages or other debts to the transferred property, as well as any obligation related to the replacement property. If you do not receive a refund, but your liability drops, it will also be considered income for you and your money.

Suppose you have a $ 1 million mortgage on your old property, but your mortgage for the new feature you receive is only $900,000. It has a profit of $100,000, which is also classified as a startup, and taxes are applicable.

1031 for holiday homes

You can sell your principal residence and, in association with your husband, shield $500,000 in capital gains if you have lived there for two years in the last five years. But this break is not a 1031 and is not available for the second holiday home.