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Dear Tax Talk,
Is it possible that property received in a like-kind exchange could be purchased prior to the sale of property given up ? What are the 1031 exchange rules?
If you follow all of the IRS rules for a “Reverse 1031 Exchange,” then yes, it is possible to acquire property in a like-kind exchange before selling the property given up.
Internal Revenue Code Section 1031 explains the 1031 exchange rules. The tax code allows the deferral of taxes on the exchange of like-kind business property for another property. These transactions allow you to reinvest all of your proceeds into the new property rather than paying the tax on the gain.
There are different types of like-kind exchanges and many rules to follow to make sure the transactions qualify for deferral of gains.
- The easiest is what’s called a “simple exchange,” where one property is simultaneously exchanged for another like-kind property.
- Then there is a “deferred exchange,” which is somewhat more complex but gives you more flexibility where you first dispose of one property and then within a certain time frame acquire the replacement property. There are companies that act as “exchange facilitators,” which handle the exchange agreement within the rules provided in the income tax regulations.
- Additionally, and lucky for you, there is a reverse 1031 exchange. However, this is even more complex, as an Exchange Accommodation Titleholder must be set up to hold title to the properties or you could end up owing all of the tax on the transaction.
Keep in mind that the properties must be investment property or used in your business. Personal-use property, such as your home or a second home, does not qualify. If cash is received or there is relief from debt, then some of the gain may be taxable. Also, the properties must be “like kind,” which means property of the same nature, character or class. You report the transaction on your tax return using Form 8824, Like-Kind Exchanges.
Thanks for the great question and all the best to you with this transaction.
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To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.