IRC §1031 Exchange: FAQ

The foregoing information is for general informational purposes only and is not intended as legal advice. Miracle, Inc. makes no warranty as to the accuracy of the information presented.  Please consult an attorney or your tax advisor.

Frequently Asked Tax Questions And Answers: Information taken from the official IRS Website:

Keyword: 1031 Like-Kind Exchange

11.4 Sale or Trade of Business, Depreciation, Rentals: Sales, Trades, Exchanges

Can you sell rental property and reinvest it into rental property without paying capital gains tax?

No. A deferred exchange will be treated as a sale rather than a tax free exchange if the taxpayer actually or constructively receives money on other property in full consideration of the relinguished property. However, rental property may be exchanged directly for other rental property of like kind. Gain realized from such an exchange is deferred. For additional information on like-kind exchanges, refer to Publication 544, Sales and Other Dispositions of Assets.

To order forms from the IRS official website: IRS Forms Contact Info

I have heard that I can sell my rental property and use the proceeds to purchase rental property of equal or greater value and the transaction is viewed just like an exchange in that the tax is deferred until the new property is sold. Is this true?

What you have heard about is a like-kind exchange. A like-kind exchange, when properly executed, represents a way to postpone the recognition (taxation) of gain essentially by shifting the basis of old property to new property. If, in addition to giving up like-kind property, you pay money in a like-kind exchange, you still have no recognized gain or loss. The basis of the property received is the basis of the property given up, increased by the money paid. There are several rules and restrictions that must be strictly adhered to in order for a successful exchange to take place. Deferred exchanges will be treated as a sale rather than an exchange to the extent that the taxpayer actually or constructively receives money or other (not like kind) property in exchange for the like-kind property given up. For more information refer to Publication 544, Sales and Other Disposition of Assets , and Form 8824 (PDF) Instructions, Like-Kind Exchanges.

Form 8824 (PDF) Instructions, Like Kind Exchanges

We sold a rental property last year and used the 1031 Tax Deferred Exchange law to defer the gain into another like-kind property. How do I report this transaction on my tax return?

Report the exchange of like-kind property on Form 8824 (PDF), Like-Kind Exchanges. The instructions for the form explains how to report the details of the exchange. Report the exchange even though no gain or loss is recognized.

If you have any taxable gain, resulting from the transaction, because you had a partially deferred exchange or otherwise received money or unlike property, report it on Form 4797 (PDF), Sale of Business Property, and Form 1040, Schedule D (PDF), Capital Gains and Losses. Refer to Publication 544, Sales and Other Dispositions of Assets, which has a detailed section on qualifying like-kind exchanges.

Form 8824 (PDF) Like-Kind Exchanges
Form 4797 (PDF) Sale of Business Property
Form 1040 Schedule D (PDF) Capital Gains and Losses

Please confer with your financial, tax or legal advisors to receive updated IRS information.