Whenever you sell business or investment property and you have a gain, you generally have to pay tax on the gain at the time of sale. Under Section 1031 of the IRC, however, if you reinvest the proceeds from the sale in similar property as part of a qualifying like-kind exchange, the tax code provides an exception, and allows you to postpone paying tax on the gain. It is very important to note that the gain from a like-kind exchange is not tax-free; it is only tax-deferred. You will eventually pay the tax on the gain if and when you dispose of the new property acquired in the exchange.
To qualify under the Section 1031 nontaxable exchange, a trade must meet all six of the following conditions:
• The property must be business or investment property; it must not have been used for personal purposes. For example, it cannot be your home or family car.
• The property must not be held primarily for sale.
• The property must not be stocks, bonds, notes, choses in action, certificates of trust or beneficial interest.
• The properties received in the exchange must be of like kind, that is, they must be of the same nature or character, even if they differ in grade or quality.
• The property to be received must be identified in writing within 45 days after the date you transferred the property given up in the exchange.
• The property to be received must be received by the earlier of: (a) the 180th day after the date on which you transferred the property given up in the trade, or (b) the due date, including extensions, for your tax return, for the year in which the transfer of the property given up occurs.