Section 1031 of the Internal Revenue Code provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged for property of “like-kind” to be either for productive use in a trade or business or for investment. “Like-kind” simply means that real property must be exchanged for real property. All real property is deemed to be “like-kind”; i.e. a duplex may be exchanged for a four-plex, a single-family residence may be exchanged for a motel, vacant land may be exchanged for an office building, etc. However, real property may not be exchanged for personal property.
An exchange is accomplished with the help of a qualified intermediary and usually involves four principal parties: the exchanger (the taxpayer), a buyer for the relinquished property, a seller of the replacement property, and an intermediary. The replacement property must be identified within 45 days after the closing of the relinquished property, and the proper Addendum to the Agreement of Sale must be executed. The replacement property must close within 180 days after closing on the relinquished property.
To totally defer tax in an exchange, the taxpayer must acquire the replacement property which equals or exceeds in value the property which he exchanges, and all of his net sales proceeds or more must be used to acquire replacement property. If a taxpayer exchanges down in value, down in debt or does not use all of the net sales proceeds in the acquisition of the replacement property, there will be tax consequences. The gain recognized, however, will not exceed the sum of the money received and the value of the “other property”.
Properties may be located anywhere with in the United States. More than one property may be sold or acquired. To qualify as an investment property, Taxpayer must not use the property for personal use more than 14 days of the year or 10% the number of days rented, whichever is greater.
Contact the Law Office of Frank P. Ermilio, Jr. for further information on 1031 Exchanges, to find out if your real estate transaction would qualify under the law, or if you need a qualified intermediary. We also specialize in drafting the necessary documents required to effectuate a 1031 exchange.
Frank P. Ermilio, Jr
Attorney At Law
1608 Spruce Street,
Philadelphia, PA 19103
P 215-732-4006 | F 215-732-0420