1031 Like-kind Exchange

Under Section 1031 of the Internal Revenue Code (26 U.S.C. § 1031), the exchange of certain types of property may defer the recognition of capital gains or losses due upon sale, and hence defer any capital gains taxes otherwise due.

Section 1031(a) of the Internal Revenue Code (26 U.S.C. § 1031) states the recognition rules for realized gains (or losses) that arise as a result of an exchange of like-kind property held for productive use in trade or business or for investment. It states that none of the realized gain or loss will be recognized at the time of the exchange.

The sale of the relinquished property and the acquisition of the replacement property do not have to be simultaneous.

The prevailing idea behind the 1031 Exchange is that since the taxpayer is merely exchanging one property for another property(ies) of "like-kind" there is nothing received by the taxpayer that can be used to pay taxes. In addition, the taxpayer has a continuity of investment by replacing the old property. All gain is still locked up in the exchanged property and so no gain or loss is "recognized" or claimed for income tax purposes.

Source: Wikipedia.org

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