DEFER THE HEAVY TAX BURDEN ASSOCIATED WITH SELLING PROPERTY
IRC 1031 allows you to postpone paying tax on the sale of property. Generally you must pay tax on any gain at the time of sale relating to business or investment property. However, if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange then you can postpone paying tax. Exchanges mainly apply to real and personal property. However, the rules pertaining to personal property are more restrictive. The exchange can also include cash, liabilities, and property that is not like-kind. Regarding who can exchange property, IRC 1031 applies to C corporations, S corporations, partnerships (general or limited), limited liability companies, trusts, and any other taxpaying entity.
Avoid pitfalls; understand the rules! The simplest type of exchange is a simultaneous swap of one property for another. Deferred exchanges allow for more flexibility but can be complex. For a deferred exchange there must be mutually dependent parties of an integrated transaction constituting an exchange of property. Avoid promoters who improperly use like-kind exchanges. They encourage non-qualifying vacation or second homes as part of the exchange and they refer to exchanges as “tax-free” not “tax deferred.”