Section 1031 is applicable to commercial real estate investors. According to Cornell Law School, it gives you the option of trading real estate with another business person straight up with no tax impact.
The idea behind this is to help you save money. However, there are many rules you have to follow and requirements to allow your transaction to happen under Section 1031.
Property use
To meet the requirements of Section 1031, you and the other property owner must use the properties for business and it must be a similar use. You need to both intend to continue to use the properties for business. The intention cannot be to sell the property.
Time limit
The transfer must also happen quickly. You have 180 days to complete the transaction. You also have 45 days to identify this as a trade property.
Tax benefit
You may want to do this to avoid a tax impact. If you use Section 1031, you will not have to report any gains or losses as a result of the trade.
Property type
You must ensure that the property falls under the definition of like kind. If they do not, then Section 1031 will not apply. For example, if one property is in the U.S. and the other property is not, they are not like-kind and this special rule cannot apply.
Section 1031 can be handy in many situations. It is a great way to get new property while getting rid of property that no longer works for you. It can be a good business move, but you have to be sure the transaction meets all requirements.
