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Tax Blog

1031 Exchanges and Investment Intent

The sale of real property is generally subject to taxes. Lots of taxes. So, those buying and selling property may consider structuring the sale as a 1031 Exchange because it allows the investors to defer capital gains taxes that would normally be due at the time of the sale. 1031 Exchanges require the seller to re-invest the proceeds in “like-kind” investment properties in order to defer the capital gains.

If someone is selling a property that was originally purchased for resale rather than as an investment, the 1031 structure will not survive IRS scrutiny. That is because the 1031 structure is made to permit the seller to essentially “swap” one investment property for another. To determine whether the sale was of “investment” real estate, the IRS will focus on the intent of the parties. While there are no set time requirements for how long a seller must hold investment property before engaging in a 1031 Exchange, generally the longer the property has been held before the sale, the easier it will be for the seller to establish that it was in fact purchased as an investment.

To ensure compliance with the 1031 Exchange requirements, it is important that the sold property was originally purchased for “investment” purposes. The same concept applies to the new investment property that the seller will purchase with the proceeds from the sale. The professionals at The Center for Financial, Legal, and Tax Planning, Inc. are more than knowledgeable with regards to 1031 Exchanges. Please contact us at (618) 997-3436 for more information.


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