What Is a 1031 Exchange?
A 1031 exchange is a transaction that allows you to exchange business or investment-use property for like-kind property. 1031 exchanges prevent capital gains tax on an investment property transaction. By completing a 1031 exchange correctly and within IRS rules and regulations, you avoid paying these taxes forever.
Our clients often ask, “Should I 1031 exchange my IRA-owned property?” The short answer is no, but let us explain.
Should You Do a 1031 Exchange On a Property Owned By Your Retirement Account?
You own property investments within your retirement account, and you know of IRC Section 1031. This provision can save or completely defer taxes when selling and re-investing investment property via 1031 exchanges. Sounds like a good plan, unless you’re dealing with a property owned by your IRA.
Why not? The income derived from the assets held in your retirement account generally flows tax-free into the account. Therefore, there is usually no need to complete a 1031 exchange. Real estate investments in an IRA already reap tax-free or tax-deferred benefits. So typically, 1031s are used for investment property not held in a retirement account.
However, there is an exception to this general rule. Your retirement account might want to engage in a 1031 exchange if debt-financing was involved in purchasing the property. If the property is partially held by the retirement account and an individual, a 1031 exchange may also work well. In this situation, it may make sense to 1031 exchange the property. You could also engage in a 1031 exchange for the portion of the property not owned by the retirement account.
It is always best to talk with a tax advisor, CPA, or attorney before engaging in a 1031 exchange. This way, you can ensure the property meets the required parameters of a 1031 exchange.
Midland 1031 is a qualified intermediary and has handled all types of 1031 exchanges. We have two Certified Exchange Specialist® on staff. If you have questions about 1031 exchanges, please contact us today!