A 1031 Exchange is an Internal Revenue Condition that allows for a tax-deferred exchange with like properties. These exchanges need to occur within a chosen period of time to qualify for the tax benefit. The exchanges are most often associated with real estate but may be done with alternative real property. There are specific regulations for people or businesses to follow in order receive a tax-deferral for the exchange of property escaping high capital gain or alternative taxes.
1031 Exchange can be performed for either business or private assets. It may also be done from a business to an individual or vice-versa. The exchange refers to the properties of the asset as being exchanged and not who is exchanging it.
The person or entity seeking to perform a 1031 Exchange has forty-five days to complete the exchange. If like-property has not replaced the initial property, this is considered a sale followed by a buy and can be at the mercy of taxes plus not deferred in accord with the Internal Revenue Code Section 1031. This will be extremely tricky when it involves real estate which may have contingencies that extend escrow.
Items eligible in 1031 Exchanges are real estate, boats, vehicles plus other tangible assets as well as farm animals. To qualify for the tax-deferral, it's imperative [that the] person doing the exchange understand what's like-kind. A house cannot be exchanged for a boat. Nor may a male cow be exchanged for a female cow as they have different definable economic properties. Whereas they need to have the same properties, they are able to differ in quality or grade. Learn more about 1031 exchange explained here.
Real estate needs to have a particular classification to qualify for a 1031 Exchange. It must be for business or investment use. A property that is being exchanged from business use has to be exchanged for either business use or investment use but can't be exchanged for person use or general sale. Therefore a rental property can be exchanged for land to be developed.
Stocks, bonds, plus other securities are not eligible for a 1031 Exchange. Inventory maintained in warehouses is just not eligible either. Additionally, mortgages and alternative debts can not take any tax-deferred advantage in a 1031 Exchange and aren't eligible items.