Tools and Investment
Actual Exchange: Exchange Requirements for a 1031 or Deferred Exchange
Amongst the three prerequisites that must be met to accomplish a 1031 exchange with complete non-recognition of capital gains, is that an actual exchange occurred and not just a transfer of property in replacement of money.
If the investor simply sells the property and reinvest the money in another property, the deals will not qualify for exchange treatment, even though it is a simultaneous process.
Like-kind exchanges can take many forms. One of these forms, the sale-leaseback, is still open to some dispute even though a leasehold interest of 30 years or more in exchange for a fee interest constitutes like-kind exchanges.
There are no income tax consequences in entering into financial transactions between spouses. Property transferred to a spouse or former spouse is treated as gift and is not considered a sale or exchange. Also, most transfers incident to a divorce are tax free. However, transactions with a former spouse are normally subject to tax unless they qualify for non-recognition under the provisions of 1031.
During the occurrence of splitting up partner investors, partnership interests are specifically excluded as qualified property under the 1031 code. However, it is possible in many situations to design a transaction to accomplish the goal of an investor to get out of the partnership and still qualify for 1031 treatment.
Exchanging with a related party is OK - but to qualify for 1031 treatment, the parties involved must know exactly what an exchange with a related party really means and the rules for making it work.
These are just a few and very general circumstances of exchange that would or would not be considered for 1031 exchange. When attempting a 1031 exchange it is best to seek advice from a tax advisor, an attorney or a QI (qualified intermediary) about the exchange’s proceedings.
If the investor simply sells the property and reinvest the money in another property, the deals will not qualify for exchange treatment, even though it is a simultaneous process.
Like-kind exchanges can take many forms. One of these forms, the sale-leaseback, is still open to some dispute even though a leasehold interest of 30 years or more in exchange for a fee interest constitutes like-kind exchanges.
There are no income tax consequences in entering into financial transactions between spouses. Property transferred to a spouse or former spouse is treated as gift and is not considered a sale or exchange. Also, most transfers incident to a divorce are tax free. However, transactions with a former spouse are normally subject to tax unless they qualify for non-recognition under the provisions of 1031.
During the occurrence of splitting up partner investors, partnership interests are specifically excluded as qualified property under the 1031 code. However, it is possible in many situations to design a transaction to accomplish the goal of an investor to get out of the partnership and still qualify for 1031 treatment.
Exchanging with a related party is OK - but to qualify for 1031 treatment, the parties involved must know exactly what an exchange with a related party really means and the rules for making it work.
These are just a few and very general circumstances of exchange that would or would not be considered for 1031 exchange. When attempting a 1031 exchange it is best to seek advice from a tax advisor, an attorney or a QI (qualified intermediary) about the exchange’s proceedings.
Publisher: Akbar Bhamani Date posted: 05/29/2007
