Good tax planning often involves the Section 1031 tax-deferred exchange because it allows you to avoid paying taxes today.

Example. You can sell your building at a taxable profit of $300,000. With a properly designed 1031 transaction, you avoid paying taxes on the $300,000 by rolling that profit into the next building.

Beware of the Surprise Exchange

Sometimes you are entering into a Section 1031 deferred exchange without knowing it. For example, when you trade your existing business vehicle for a replacement, that’s a 1031 exchange.

You generally don’t want that 1031 tax-deferred treatment if your existing vehicle, airplane, or other asset would produce a tax loss if sold outright. Why? Because with the 1031 trade-in, you cheat yourself of the current tax loss and defer that loss to future years—usually an undesirable event.

Planning tip. Don’t use the 1031 exchange on assets that would produce a tax-loss benefit. This is one of the two times to avoid the 1031 exchange.

Second Time

The second time to avoid the 1031 exchange is when you are self-employed and you can use the sell-and-buy strategy to save on self-employment taxes. You are in this favorable tax-saving situation when ... Log in to view full article.