1031 Exchanges: Tax Exemptions

1031 Exchanges and Tax Exemptions

As is often the case with processes such as a 1031 exchange, there is the potential for it to affect your taxes at the end of the financial year. If you are looking into a 1031 exchange, it’s important to know whether the process offers any tax exemptions on the property involved – or whether you are likely to incur additional tax when the time comes to submit your return. As an estate planning and wills and trusts firm, Davidson Law Group can offer some general advice so that you know what to expect.

1031 Exchanges and Tax Exemptions

Are you the owner of an investment property? If you are, you might not be aware of the potential tax benefit you could be eligible for. 1031 refers to Section 1031 of the IRS tax code that offers some unique tax exemptions for investment property owners. While we have covered it in a previous blog, we will briefly explain what these benefits are here.

A 1031 exchange is also known as a “like-kind” exchange, meaning you won’t have to pay tax on a property you have bought within the tax year and made a profit from. However, there is some important fine print that you need to know before you proceed.

Related Post: Important Rules to Remember with 1031 Exchanges

Is It Really A Full Exemption?

Unfortunately, a 1031 exchange isn’t a full tax exemption. It is much more helpful to think of Section 1031 as a postponement, rather than an actual exemption. You will not be required to pay the tax on a like-kind property immediately, but you will have to pay for whatever gains you made on the property in the future. This is an important distinction from thinking of 1031 as a full exemption, but postponing having to pay tax can be helpful to someone who has just purchased an investment property.

Related Post: Five Benefits of 1031 Exchanges

Know the Rules of Your State

As with any tax-related rules, it is important to know whether the laws in your state affect the kind of taxes you pay and when. If you are not a resident of the state in which you have bought a like-kind property, you may be required to pay tax at the closing.

This is known as mandatory withholding and is done to ensure that the state collects the taxes they are owed from a non-resident. In some states, this is the responsibility of the buyer, while in others it is deferred to a specifically authorized agent.

Fortunately, most states will honor a 1031 exchange, meaning the gains tax will be postponed as normal. Just make sure you are aware of any different paperwork that a particular state requires you to complete.

Contact Us About 1031 Exchange Advice

The nuances of Section 1031 are many and are difficult to properly and clearly layout in a single blog. As with all matters relating to your taxes, your individual situation – whether business or personal – will be unique. Your best bet is to speak with a qualified attorney for detailed and specific guidance.

Looking for advice before you embark on a 1031 exchange? Or looking to contact a wills and trusts attorney? Contact the Davidson Law Group in Fort Worth, Allen, or Tyler today. Our estate planning attorneys have a passion for people and will help you to establish your Texas legacy.