Practice Subgroup

Section 1031 and other tax-deferred exchanges

Our attorneys have the sophistication and experience to assist clients in the implementation of a 1031 exchange, as well as other tax deferred strategies and transactions, and can advise on the issues and complexities involved in such transactions.

The name for the transaction is derived from the section of the Internal Revenue Code that applies -Section 1031. Under this tax code section, no gain or loss is recognized on the exchange of property held for productive use in a trade or business, or for investment. Essentially, a 1031 exchange is a method where a property owner trades one or more relinquished properties for one or more replacement properties, while deferring payment of federal and some state taxes. Under the current law, a 1031 exchange may only be used for real estate.

The theory behind 1031 exchanges is that since the individual is "exchanging" properties, as opposed to selling one and purchasing another, no gain is actually being realized. It is important to note that the government does not consider the transaction a "tax free" transaction because the taxpayer's basis in the acquired property remains the same as it was in the original property. Since the basis remains the same, when the taxpayer sells the acquired property his gain will include any gain from the original property plus any gain from the acquired property.

Tax deferred transactions are not limited to 1031 exchanges. For example, when a taxpayer has property stolen, taken by condemnation or damaged by casualty, Section 1033 of the Internal Revenue Code offers tax deferral similar to section 1031. In many ways, Section 1033 could be even better for the taxpayer. It is this depth of knowledge that drives us to always be a step ahead in order to move our clients' needs forward.

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