How Does the Tax Reform Affect 1031 Exchanges in the U.S.?

How Does the Tax Reform Affect 1031 Exchanges in the U.S.?

If you plan to conduct a Section 1031 land exchange in the U.S., be aware that the Tax Cuts and Jobs Act has laid out new rules for such transactions.

Previous guidelines allowed the exchange of personal property for real estate, but a 1031 transaction should now exclusively involve properties, particularly like-kind assets. 1031 Exchange Place notes that those who are uncertain of doing a 1031 land exchange should consider consulting a property expert before exploring a new deal.

Exchange Process

A 1031 property transaction usually starts with the investor closing a sale on their asset. A qualified intermediary, which could be anyone except for the owner’s accountant or attorney, would then hold the proceeds from the sale. The investor has 45 days to find up to three assets that are classified as like-kind under the Internal Revenue Service’s definition of a 1031 transfer.

Upon finding a suitable property, the investor would need to take possession of the asset within 180 days. Note that only commercial properties are eligible, which means exchanging your own residential house for a multifamily asset will not let you defer any payment on capital gains tax.

Tax-Deferral Strategy

Other than postponing payment on capital gains tax, there are other scenarios when investors seek a 1031 land exchange. It could involve swapping several properties that are difficult to manage in favor of a single yet larger asset.

In some cases, the owner’s profession could be a reason. A doctor, for instance, may sell an apartment building and use the proceeds to buy an office for his or her own clinic. You could even exchange a similar rental property in your area for a similar asset in another state.

Remember that Section 1031 exchanges only serve as a legal way to defer taxes and not avoid paying it altogether. When planning a certain transaction, it is better to talk to a professional to learn about the requirements and the legal processes involved.