A 1031 Exchange May Help You Own A Home In Tucson
What is a 1031 Exchange?
A 1031 exchange is a type of real estate transaction that can defer any tax gains. The key to a 1031 is an exchange is that the subject property must be “like-kind” property. The advantage of a 1031 exchange is that income taxes are not paid at the time of the exchange.
The tax code creates property “classifications”. The classification of a property determines if it qualifies for a “1031 exchange”. Tax-free exchanges are under Section 1031 of the Federal Tax Code.
There are four classifications of Real Estate established by the Internal Revenue Service. The IRS’s definition for 1031 exchange property is:
- Primarily held for sale. (Dealer Property)
- Held for personal use. (Personal Property)
- Held for investment. (Investment Property)
- Held for productive use in a trade or business. (Business Property)
Only classifications 3 & 4 qualify for a 1031 Exchange. Property received and the property sold “or given” must be of “like-kind“. The use of the property determines its classification. Should the receiver of the property use it differently, it does not affect your tax status.
The Key Is “Like Kind”
Remember “like kind” is based on your use of the property. Its grade or quality is not considered. Section 1031 treatment is not applied to property held outside the United States.
Vacation homes do not qualify for Section 1031 treatment if used solely for personal use. But may qualify if rented. It must pass a use test each year. Search Condos For Sale in Tucson AZ.
This information is provided as general background on the subject of Section 1031 exchanges. It does not cover all issues or rules on the subject. It is not a substitute for advice from your professional tax adviser. You should always consult your financial or tax adviser on such matters.
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