Section 1031 of the United State Tax Code provides that when property held for productive use in a trade or business or for investment and is exchanged for the same kind of property, the capital gains can be deferred. The transaction is called an exchange because one property is being exchanged for another.
Taxes are allowed to be deferred because legislators reasoned that when a property owner has reinvested the proceeds from one sale into another property, no funds have been generated on which to levy taxes: The taxpayer's investment is still the same, only the form has changed.
As with many tax questions, claiming a 1031 exchange can be complicated, and you must properly comply with several requirements. Section 1031 requires that a qualified intermediary (QI) facilitate the property exchange. The QI cannot be the taxpayer or anyone the taxpayer has a business or family relationship with previous to the exchange.
To ensure you are avoiding taxes, which is lawful, and not evading taxes, which is against the law, you will want to consult a 1031 Exchange attorney, who can advise you on:
A 1031 Exchange defers the payment of taxes; it is not a tax-free transaction. An experienced attorney can advise you on the tax consequences of exchanging property versus selling it and realizing capital gains.
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