Section 1031 Tax-Deferred Exchange Replacement Property Programs: A Brief History

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Section 1031 Tax-Deferred Exchange Replacement Property Programs: A Brief History

the FEE SIMPLE, Spring 2016

by Louis J. Rogers

I. INTRODUCTION TO SECTION 1031 TAX-DEFERRED EXCHANGES

A. Section 1031 – Tax Deferral

Section 1031 of the Internal Revenue Code provides that no gain or loss shall be recognized if property held for productive use in a trade or business or for investment is exchanged solely for property of like-kind to be held for productive use in a trade or business or for investment. Section 1031 provides an exception to the general rule of current gain recognition (taxation) on the sale or exchange of property.

In a qualifying Section 1031 exchange, the gain that otherwise would be recognized (taxed) is deferred until the replacement property is transferred in a later taxable transaction. Note that the replacement property may be transferred in another qualifying exchange, continuing the deferral. Some taxpayers exchange over and over again throughout their lifetime in a series of transactions called “swap until you drop”. While this is technically deferral and not exclusion of taxable gain, the gain may be deferred for a very long time.

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