The IRC 1031 Tax Deferred Exchange, in brief- Part One
Posted by admin on March 12, 2008 in Finance :: Tax
how does a 1031 exchange workSection 1031 was introduced by the IRS in the summer of 1990. It was a long-awaited decision and welcomed by all within the United States. Later on it came to be known as the IRC 1031 Tax Deferred Exchange, or simply the 1031 Exchange. Starker Exchange is another name for it.
In brief, the IRC 1031 is a tax deferral system, whereby the seller of a real estate is not required to pay the capital gains tax under certain circumstances.
So what are these circumstances?
The circumstances are that both the properties involved, i.e. the relinquished property as well as the replacement property must be of a like-kind. The term like-kind here refers to the usage of the properties and not the grade or the quality. This means that both the properties involved must be used for similar purposes.
For the purposes of tax deferral, the IRS has classified all properties into four categories. Properties used for business and trade fall into the first category. Business and trade means any manufacturing, trading, merchandizing, and so on. Even if a property has been used exclusively for subletting purposes, it falls under this category. The fact that a building is a factory premises or a residential apartment is unimportant here.
