1031 Exchanges

The Internal Revenue Code includes Section 1031 which states that there is to be no gain or loss on the exchange of property held for productive use in a trade or business, or for investment. A 1031 Exchange is a tax-deferred exchange of a relinquished property (property “A”) for the acquisition of a “like kind” replacement property (property “B”), while deferring tax payments on the transaction until a later date. Basically, a taxpayer has more money available to invest in other property. It’s like having an interest-free loan from the Federal Government. The key here is tax-deferred, not tax free. Eventually, when property “A” is sold, the original deferred gain plus anything additional is taxed. The investment is still the same, only the form has changed.

Every 1031 exchange is different. Following are some general guidelines on the transaction. If you choose to participate in a 1031 exchange, always consult with an attorney, expert, or tax advisor to determine the best option for your situation.

There are several different types of 1031 exchanges. A Simultaneous Exchange is when the exchange of property occurs at same time. A Delayed Exchange allows time between the transfer of property “A” and property “B” and is the most common transaction type. In a Build-to-Suit Exchange, the taxpayer can improve on or build on property “B” using exchange proceeds from property “A”. A Reverse Exchange, or a “parking arrangement”, is when property “B” is acquired prior to transferring property “A”. The IRS offers a safe harbor for reverse exchanges. Finally, a Personal Property Exchange is one that is not limited to real property and can include personal property.

In order to arrange an exchange, there must first be qualifying property with a proper purpose for the arrangement, like an investment. The properties must be of like kind, meaning of the same nature or character. In order to defer all taxable gain, the value of, equity in, and debt on property “B” must be equal to or greater than that of property “A”. All net proceeds from the sale of property “A” must be used in their entirety in order to acquire property “B”.

A 1031 exchange involving business or investment property in Colorado is a desirable option for astute investors looking to buy and sell Colorado ranches and other Colorado property without having to pay capital gains tax.