This
law, unique to the U.S., was originally created to benefit real
estate investors by allowing them to move from an investment
property to a higher value property while deferring the capital
gains taxes due from the sale of the original property. Section
1031 applies to all like-kind properties, including real and
personal and it is, increasingly, being used for
purposes other than real estate.
Example: A construction company acquires a
new piece of equipment for $100,000 then, by taking the
depreciation allowance over several years, reduces its basis to
$20,000. Now it wants to replace it with new equipment. The used
equipment might sell for $50,000 and the $30,000 will be taxed
as ordinary income.
By structuring the sale of the used
equipment and the purchase of the new, through a 1031 exchange done
through a Qualified Intermediary (QI), the company can defer the
tax and have substantial cash savings.
For large companies, in constant need to
replace equipment, such as manufacturers and O&G operations,
this can result in millions of dollars in savings. Applications
have been found for exchanges involving collectible cars and
race horses.
Traditionally, most exchanges, if not all,
handled by QIs involved real estate, however, more and more
clients involved in the sale and purchases of corporate assets,
realize the benefit of using Section 1031 to save taxes on their
exchanges.
