Bartering property by way of a Section 1031 like-kind exchange could benefit you. It could provide you with the resources you need that could later help you make a profit. A 1031 exchange like-kind transaction can also help you defer capital gains taxes, but you have to know if you qualify.
Here’s the criteria of 1031 in-kind exchange property:
You own it for commercial purposes. Whether it is highrise condos, production warehouses, shipping and receiving docks, or retail stores; it all counts as commercial property. Another example is office buildings.
You are a business owner. This qualifies you to trade any kind of commercial real estate because all transactions are supposed to be businessrelated. However, you have to differentiate between real and personal property. Real property is usually land with buildings on it, and personal property is usually individual rental houses or vacation property.
The property you want to trade is like another. It does not have to be identical. For instance, you can trade a rental home for a piece of vacant land. You also could swap an office complex for a warehouse. (Real property is exchanged for real property and personal property for rental income is traded with 1031 exchange like-kind personal property.)
The real estate itself is not being sold just for cash. If you are offered cash or proceeds that are not likekind, you will need to wait until after your 1031 exchange like-kind is complete. Otherwise, you run the risk of owing nondeferred capital gain taxes.
A replacement property is awaiting you. You need to choose one within 45 days from the time you give up the property you currently own. Then, you need to receive your replacement property within six months of trading it for the one you want to relinquish.
The real estate is not for personal use. Even if just as rental income, no home you reside is likely to qualify if you are still living in it. Ideally, you should have already leased it to a tenant for at least a year.
The property is located in the United States. Both your potential replacement property and relinquished property should be located in the United States. No foreign exchanges for domestic properties qualify.
The gain for any exchange not solely in kind will be adjusted based on the fair market property value. This calculation is usually made based on the difference in value between the two pieces of real estate. It is highly advisable that you seek help from a certified, bonded and insured Section 1031 like-kind exchange professional as you complete this transaction.
Resources
Cornell Law: https://www.law.cornell.edu/uscode/text/26/1031
IRS:
https://www.irs.gov/taxtopics/tc703.html
https://www.irs.gov/uac/LikeKindExchangesUnderIRCCodeSection1031
