The Internal Revenue Code
imposes taxes when property is
sold or transferred and a gain
is realized. According to
Section 1031 of the tax code, if
a taxpayer adheres to strict
code guidelines, then all or a
portion of the gains from the
disposition of business or
investment property can be
deferred or reinvested into a
new replacement property.
These deferred gains, as well as
the gains from the new property,
are not taxed until the new
property is transferred and
fails to qualify for tax
deferral.
To qualify for tax deferment,
the taxpayer must structure the
transaction as an exchange of
one property for another of
"like kind". A seller must contractually
arrange to convey his or her
interest in the property being
sold in exchange for receiving
an interest in another piece of
commercial property. If cash is
involved, an escrow company or
facilitator usually it, because
treatment under section 1031
won’t be possible if the
proceeds are paid to the seller
even for an instant. In
practice, however, the rules for
a 1031 exchange can be quite
complex and it is easy for a
seller to run afoul with them.
It’s always advisable to have
competent legal counsel involved
in the transaction.
(Read Section 1031)
