Landlords and business owners may consider swapping properties during their careers, but have to contend with capital gains taxes in case their property sale nets them profit. Having that profit can help in securing a new property, though, which is where a 1031 exchange comes in.
A 1031 exchange facilities tax-deferment, meaning that a property owner still has taxes to consider regarding that sale. The due date for those taxes instead falls to the sale of the replacement property. As Forbes details, like-kind exchanges involve plenty of paperwork, oversight and a narrow definition of which properties count between each other.
Like-kind and not like-kind
1031 exchanges used to apply to many business assets before 2018. Paintings, industrial equipment and more used to fall into a like-kind comparison. Since 2018, tangible property like buildings see the best use out of like-kind exchanges — though as the IRS points out, certain exchanges of mutual ditch, reservoir or irrigation stock count as well.
When a business owner exchanges one like-kind property for another, those capital gains taxes defer out. But since one property can be worth more than another, a transaction may involve an exchange of not like-kind assets alongside. This may sweeten the deal, but those still count for immediate capital gains taxes.
Timelines and paperwork
A 1031 exchange requires a lot of planning and consideration. The business person in question needs to know the replacement property they intend to swap for the original within 45 days, and the closing of the new sale has to happen within 180 days of the original sale. Should the replacement property be out-of-state compared to the original, a state may demand regular reporting on the new property’s gains.
Property owners should use every tool available to them in order to identify what can fall under a 1031 exchange and how it might help their property sales.