Tax time is here, and even while you’re puzzling over that pile of papers on your desk, you may already be planning for next year. If selling an asset and purchasing another is in your plans for 2009, you may want to consider a 1031 exchange.
A 1031 exchange is an IRS-recognized method of deferring capital gain taxes. A capital gain is any profit that comes from the sale of a property, and this income is taxable. However, there is a way around this particular type of tax. If you sell one asset and acquire another within a specific time frame, you’ve performed a 1031 exchange. The logistics of an exchange are the same as in a sale, except that the asset sold and the asset purchased must be of equal value, or like-kind, and must be used for a business in order for the transaction to qualify for the tax deferral. The idea behind this particular section of the tax code is that when money gained from the sale of an asset is used to purchase another like-kind asset, there is no economic gain.
The tax code is fairly clear on its definition of like-kind when it comes to depreciable property, like a piece of machinery, but its definition of like-kind in real estate transactions offers less guidance. This is where working with an experienced appraiser becomes important. Because the IRS keeps an eye on these types of transactions, you want to make sure that you’re working with an appraiser who understands the IRS like-kind definitions.
So after you clear that pile of papers from your desk, keep this possibility in mind – it may make next April 15 a bit easier.By: Present Value LLC
