When selling investment property or a business, the tax implications from the sale's profit can be deferred using Section Code 1031 of the United States Internal Revenue Service. The IRS allows for like-kind tax free exchanges if certain conditions are met. This page explains what the code means along with the usefulness and pitfalls of the using tax free exchanges in steps.

Everyone likes avoiding taxes when they can. While an illegal tax dodge will get an individual or corporation into more trouble than it saves them, section 1031 is touted by the IRS. The biggest drawback is that most investments do not qualify for the section 1031 exchanges, for those dealing with property and business that do, the option should be considered for tax savings.

Before you can use or identify an asset that qualifies as a like-kind investment property, you will have to understand what is in section 1031. First step will explain questions about the tax free exchanges. Then the next step will be to evaluate the advantages of the exchange. Finally in the last step, different qualifications and reporting will be covered in simple to understand terms.

Unlike some tax breaks, the IRS has touted the advantages of a tax free like-kind exchanges covered in their Code Section 1031. The Code is more of a tax deferral than a tax break, but there is no penalty for deferring the tax on the gain from selling of investment property. Below is a list of what is and is not include in the exchange.

What can be included in the deferment? A business or investment property including land or buildings all qualify for the exchange. Investment property is that which is used for business, trade or investment.

Who can qualify to use 1031? Individual, partnerships trust, corporations or any entity that is required to pay taxes on a gain from a sale of property are all eligible.

Can personal property Qualify? Yes but the rules are different and more complex for personal property.

What is the easiest way to do a like-kind exchange? The easiest way is to find two properties that are similar and simply exchange them between the owners.

What is the time limit if you sell the property rather than trade? To hold on to the tax deferment you must find a similar property within forty days, and a file notice with the IRS. Then the seller has 180 days to complete the transaction.http://www.irs.gov/businesses/small/industries/article/0,,id=98491,00.html

Any time a business or individual sells a property or business for a profit, they must recognize the gain from the sale. The taxes on the gain can cut into the investing potential of the entity and limit their ability to continue on. Such was the case until Section Code 1031 was established. This allows a seller several options to defer the tax on the profit. Some advantages:

1. Deferring an increase in property value. While everyone wants a property’s value to go up, the tax on the gain can stifle a companies or taxpayer ability to be mobile. With the like-kind exchange the taxpayer can move as they see fit.
2. Should an investor be approached about trading a similar properties, Section Code 1031 covers the transaction and the taxes on the gain are differed. This is the easiest exercise of the like-kind exchange. This can work well when a company or individual needs to relocate.
3. When an investor sells a property they can have the buyer provide them with a similar property to buy so the tax gain can be deferred. The investor has 45 days to find a property, and notify the IRS of the planed acquisition of the property.http://www.irs.gov/businesses/small/industries/article/0,,id=98491,00.html

Like everything that has to do with life and taxes there are limits and the IRS has certain limits and requirement before the exchange can be considered for tax deferment. Listed below are a few limits to what can be done with tax free exchanges.

1. You cannot sell inventory, stocks, bonds, notes, securities debt, partnership interest, or certificates of trust.
2. You cannot just sell a property and buy another property. That would result in any gains being taxed from the transaction.
3. You must compete the exchange of property within 180 days. There is a time limit to entering into a Section Code 1031 and it needs to be adhered to.
4. You may nullify the tax deferral if you take possession of cash in the transaction before they exchange is complete. Money changing hands can null the acceptance as a like-kind exchange..http://www.irs.gov/businesses/small/industries/article/0,,id=98491,00.html
5. You cannot act as your own facilitator, nor can any lawyer, accountant, banker, or real estate broker that you have worked with in the past two years.
6. While the gain in the property is deferred, it is not forgiven. The basis must be kept track of.http://www.irs.gov/businesses/small/industries/article/0,,id=98491,00.html

An up to date form IRS form 8824 about the tax free like-kind exchanges in the IRS’s Section Code 1031 is available on the IRS’s website: IRS form 8824

The content in this page is not a substitute for professional financial advice. Please contact a finance professional before using the information presented here.