Internal Revenue Code Section 1031 provides that no gain or loss will be recognized on the exchange of any type of property held for productive use in 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 trade or business or for
investment. 1031 Exchanges are typical sales and purchases that involve the same exact ingredients as any
other sale or purchase, without the drain of capital gain taxes.
WHO SHOULD CONSIDER A 1031 EXCHANGE?
Anyone who is considering selling a property held for productive use in trade or business or investment
should consider the 1031 Exchange. The Exchange offers an investor an opportunity to reinvest the federal
capital gains that would normally be handed over to the IRS. Essentially, 1031 Exchanges should be
thought of as an interest free loan from the IRS; one in which the principal may be increased through
subsequent exchanges and may never require repayment.
ADVANTAGES OF EXCHANGING
- The deferred income taxes increase the investor’s buying power.
- An Investor gains greater selling power and flexibility because the need to inflate the sales price in order
to cover the capital gains expense does not exist. - An investor can acquire a replacement property with greater income potential. Raw land could be
exchanged for income producing apartment property. In addition, a small office building could be
exchanged for a larger office complex or a Class B building for a Class A industrial complex. - The Investor can consolidate several management intensive properties into one property or diversify
several small properties into one large property. The Exchange provides an excellent opportunity to relocate
or expand a current business or investment.
BASIC EXCHANGE REQUIREMENTS
• Both properties must be “like-kind”.
• Both properties must be held for investment or for productive use in trade or business.
• Investor must use a qualified intermediary or facilitator.
• Investor must adhere to strict time limitations.