1031 Exchange
1031 Exchange / Like-Kind Exchanges
The section of the IRS code which deals with tax-free exchanges of certain property is Section 1031.The general rules for tax-free exchanges are that the properties must be exchanged, similar, and used as an investment or for business. A 1031 exchange is also called a like-kind exchange.
1031 Exchanges can be an investment strategy in the sense that you are upgrading your portfolio to better income producing properties or putting your money into properties with a great potential for asset appreciation.
The following information comes from the IRS Website, http://www.irs.gov/businesses/small/industries/article/0,,id=98491,00.html
Like-Kind Exchanges – Real Estate Tax Tips
Generally, if you exchange business or investment property solely for business or investment property of a like-kind, no gain or loss is recognized under Internal Revenue Code Section 1031. If, as part of the exchange, you also receive other (not like-kind) property or money, gain is recognized to the extent of the other property and money received, but a loss is not recognized.
Section 1031 does not apply to exchanges of inventory, stocks, bonds, notes, other securities or evidence of indebtedness, or certain other assets.
Like-Kind Property
Properties are of like-kind, if they are of the same nature or character, even if they differ in grade or quality. Personal properties of a like class are like-kind properties. However, livestock of different sexes are not like-kind properties. Also, personal property used predominantly in the United States and personal property used predominantly outside the United States are not like-kind properties.
Real properties generally are of like-kind, regardless of whether the properties are improved or unimproved. However, real property in the United States and real property outside the United States are not like-kind properties.
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John Marion
John’s comments are correct. A primary residence is not eligible for 1031 consideration. Partial exchanges are allowable where the net equity and debt of the new property is less than that of the old property. Often times, the Exchangor would like to receive cash at the first let closing. That cash is known as equity boot and is taxable. An alternative to pulling out cash is once the replacement property has closed, pull cash out through an equity loan. Though this increases the debt, the cash is not taxable.