Tax Consequences - Qualifying Transactions

Qualifying Transactions
Under Internal Revenue Code Section 1031, you may not have to pay tax on a gain realized on the exchange of certain properties held either for an investment or for use in a trade or business. These exchanges are typically known as "like-kind exchanges," if the three conditions below are met:

  • The transaction is an exchange.
  • Property is like-kind property.
  • Both property transferred is used for trade, business or for investment.

Qualified exchanges will allow you to defer the gain; however, losses are not deductible unless you give up "unlike" property. The term "like-kind" refers to the nature of the property, not the condition. For example: real estate for real estate, computers for computers and machinery for machinery all qualify. It does not matter as to the condition, age, quality or brand of the property as long as they are from the same type of class. Land trades can be made for other land lots, buildings, farms, real estate and city lots and still maintain the qualified status.

Qualifying Property for the Like-Kind Exchange:

  • Real estate
  • Machinery
  • Equipment
  • Office furniture
  • Computers
  • Most other real and personal property (used for income or investment purposes)

Non-Qualifying Property:

  • Inventory of a business
  • Notes
  • Securities
  • Partnership interest
  • Certificates of trust
  • Foreign real estate
  • Property used for personal purposes
  • Livestock of different sexes
Liabilities & Boot
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