A 1031 Exchange is a like-kind exchange that allows you to exchange property used for investment or in your trade or business, for other property to be used for the same purposes. Section 1031 of the Internal Revenue Code provides an exception that allows you to defer payment of capital gains taxes when you sell business or investment property if you reinvest the proceeds in similar property through a like-kind exchange—which is the purpose of the 1031 Exchange. To qualify for a 1031 Exchange, you must “trade up” for a property that is equal or higher than the sale price of the first property.
According to the IRS, a “reverse exchange” is somewhat more complex than a “deferred exchange.” It involves the acquisition of replacement property through an exchange accommodation titleholder, with whom it is parked for no more than 180 days. During this parking period, the taxpayer disposes of its relinquished property to close the exchange. All the proceeds made during the property sale must be put toward a down payment on the replacement property.
The IRS states that certain types of property are specifically excluded from Section 1031 treatment. Section 1031 does not apply to exchanges of:
- Inventory or stock in trade
- Stocks, bonds, or notes
- Other securities or debt
- Partnership interests
- Certificates of trust