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USA Tax Glossary
A 1031 exchange, also called a like-kind exchange, can allow gain deferral when business or investment real property is exchanged for other like-kind business or investment real property.
Investor Context
Real estate investors use 1031 exchanges when selling investment property and acquiring replacement investment property. Current federal rules generally limit Section 1031 nonrecognition to real property, not personal property.
Why It Matters
It may defer gain, but it does not eliminate tax forever.
Deferred exchanges generally require written replacement property identification within 45 days.
Replacement property generally must be received within 180 days or by the tax return due date including extensions, whichever is earlier.
Records To Prepare
Qualified intermediary documents
Relinquished and replacement property closing statements
Written identification records
Form 8824 reporting details
Common Caution
Timing rules are strict. Missing identification or receipt deadlines can make the exchange taxable.
Direct Answers
Section 1031 generally applies to business or investment real property, not property used solely as a personal residence at the time of exchange.
Form 8824 is used to report like-kind exchanges.
Official IRS Reference
IRS: Instructions for Form 8824Related Terms
Depreciation recapture rules can cause part of the gain on sale of depreciated property to be taxed differently because depreciation deductions were allowed or allowable before sale.
Depreciation is the annual deduction that lets a taxpayer recover the cost or other basis of business or income-producing property over a number of years.
Schedule E is the Form 1040 schedule used to report income or loss from rental real estate, royalties, partnerships, S corporations, estates, trusts, and REMICs.
