The 1031 like-kind exchange tax benefit

On Behalf of | Apr 24, 2023 | Tax Issues

The 1031 exchange could offer qualifying Pennsylvania residents a significant tax break. The tax break could go to those who sell investment properties or businesses, but the taxpayer must meet the requirements necessary to receive the tax benefit. Elements of the 1031 exchange could be complicated, which is why reviewing the specific details of the tax code seem necessary when trying to access the opportunity.

Investments and the 1031 exchange

The 1031 exchange involves capital gains on selling a business or investment property. Capital gains are the profits derived from the sale. So, if someone purchased a vacation home for $100,000, spent an additional $50,000 on deductible expenses and sold the secondary home within 18 months for $175,000, the capital gain would be $25,000. The seller could be subject to capital gains tax.

The 1031’s like-kind exchange deal could offer a solution to those concerned about paying the tax. Under U.S. tax law, someone can postpone their capital gains tax when using the proceeds to purchase a similar property. For some taxpayers, that money saved could be a significant sum.

Statutes and rules

The rules related to the 1031 like-kind exchange establish that the deal only applies to investment properties. Those selling their primary home or stocks and other investment assets would not access such a benefit. Also, receiving the cash prematurely could undermine the benefit sought.

Other issues could arise when someone only uses a portion of the capital gains towards the like-kind exchange. So, if the capital gain is $50,000 and $40,000 goes towards a new purchase, tax issues may arise with the remaining $10,000. Taxpayers seeking like-kind exchange savings might still have a tax burden to address.

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