Clarification from IRS on 1031 exchanges

Like-kind exchanges, also known as 1031 exchanges, nearly wound up on the U.S. Treasury Department’s list of abusive tax-avoidance measures. Instead, thanks to the lobbying group Real Estate Roundtable and members of the American Bar Association’s tax section, the Treasury Department is revising the form that 1031-exchange investors must file. The revisions more clearly spell out what actions are acceptable in a 1031 exchange.

Like-kind exchanges allow property owners to defer capital-gains taxes when they sell an investment property and purchase a "replacement" property in a specified amount of time. The Treasury Department initially expressed concerns about related-party exchanges, which are transactions involving business partners, relatives, or companies owned by the same entity. These types of exchanges are not legal in some circumstances.

The revised form will require investors to provide more detail about the exchange, including information about the purchaser of the original property and the list of replacement properties that were considered. These additional details, industry experts say, should help 1031-exchange investors know what is allowed and provide them some measure of assurance they are playing by the rules.

Illustration © Artville.

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