The Tax Cuts and Jobs Act (TCJA) tossed an unwanted rule into Section 1031 by forbidding exchanges of personal property.
But before we move on, let’s clarify one thing: Section 1031 is not an “exchange,” which is defined by Merriam-Webster as a trade. In a tax code 1031 exchange, you generally would
engage an intermediary to handle the money and the tax paperwork;
sell your real property; and
buy the replacement property.
So you are buying and selling, but when you do this under the Section 1031 tax rules, you don’t pay taxes on the sale. Pretty sweet, huh?
You are not off the hook. You can look at it this way: with the exchange, you push the tax you’ve avoided to the replacement property instead.
You can keep doing this until you die, and then with the estate tax exemption, you may avoid paying any taxes—and your heirs inherit the property at its stepped-up basis. (That’s the way the death part has been for some time, except for in 2010, and the way it is at the moment.)
Now that you have the big picture, let’s see how you can put this tax-favored law to work for you. ... Log in to view full article.