What family business owners need to know about like-kind exchanges

What family business owners need to know about like-kind exchanges

At present, virtually any business owners has the possibility to sell his company or investment property without being tax liable. There is a special kind of transaction that allows people to dispose of an asset and acquire a similar one without having to pay the capital gains tax. This trading is called the 1031 Exchange. A 1031 exchange, commonly known as like kind exchange real estate, is a business tool that gives way to deferring capitals gains tax. Not that many people know that like-kind exchanges were originally intended to help family farmers avoid the capital gains that are normally associated with such trading. If you are a family business owner who is interested in reinvesting and implicitly in expanding operations, you should really consider making an exchange under the IRC Section 1031. It is definitely worth considering his kind of swap, but it is important to keep in mind that there are several aspects you need to be aware of.

The property has to be like-kind

You do not have to be the most intelligent person on the planet to figure out that like-kind means like-kind. Well, the matter of fact is that many business owners are under the impression that this is only a formality. The truth is that 1031 deals are very strict and this is the reason why you should take them very seriously. Like-kind real estate refers to assets that are of the same type. Even if the properties differ in grade or maybe quality, they must be of the same type. This means that you can sell and replace only real estate that is similar in nature. For example, you are free to swap a condominium for a warehouse or a commercial establishment providing lodging for an office building. The list of examples is endless, so if you want to find out more, you will have to search online.

Section 1031 applies only to real estate

Without any doubt the most important about 1031 exchanges is the fact that they only apply to real estate. This translates into the fact that you are not eligible for the trading if you have acreage for sale. Another thing that is worth mentioning is the fact that the property should not be used for personal use. The real estate has to be held for productive use and the result is that the tax-deferred swap cannot apply to family homes or personal vehicles. What is more, you cannot purchase property from a related party, except under certain circumstances.

Personal property can be exchanged

Although it seems almost impossible, the matter of fact is that you have the possibility to swap a personal property for a similar one as long as certain criterions are met. They are just as common as trading real estate, but attention should be paid to the fact that you cannot trade personal property for real estate property. Common examples of personal property include office chairs, vehicles, and handling equipment. These have to be used for business purposes.