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How does a 1031 property exchange work?

Relatively simple process but the legal fees are usually more costly.

Lets say you own a piece of substantially appreciated real estate that if sold would generate large CG. You have an opportunity to sell and rather than taking cash you identify another piece of real estate which you would like to own. You have the buyer of your property purchase the tract you would like to own and then "swap" your tract for his tract.

As long as you do not receive any cash or other "boot" in the exchange then no gain to you on the swap. Cost basis in new property equals cost basis in old.

This requires an attorney who is aware of the 1031 rules in order to accomplish the swap. There are other rules associated with these swaps that an attorney/CPA can assist you with as you approach such a transaction.

I recently assisted a client in such a deal whereby his substantially appreciated farm was swapped for rental real estate at a local resort. He plans on retiring in a few years and then converting one of the rental units to his personal residence - which he will be able to sell tax free for 250k gain after two years as his personal residence.

1031 is a great tool in the right situations.


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