1031 News

Internal Revenue Code Section 1031

IRC Section 1031 has been in the Tax Code since 1921. However it was not until a landmark legal decision was handed down in the late 1980s followed by some detailed regulations put forth by the Treasury Department in 1991 that exchanges began to flourish. Almost since the beginning, many taxpayers conducted real estate exchanges and received tax deferral.  Taxpayers, and their professional advisors, were a bit slower in taking advantage of the same tax benefits from exchanges of tangible personal property.   They thought exchanges applied only to real estate. 

Likewise it was even longer by the time taxpayers took advantage of exchanges of intangible property.  Examples of intangible property include such things as franchise rights and automobile dealership rights.  A recent Private Letter Ruling provides a good reminder that exchanges of intangibles are possible and also provides some excellent analysis for determining whether certain intangibles are ...

Non-recognition of gain related to exchanges of property have been part of our country’s tax law for nearly 100 years: first, as part of the Revenue Act of 1921 (under Section 202 and then under code Section 1031 as part of the 1954 amendment to the tax code.  Its longevity speaks to the effectiveness of like-kind exchanges (LKEs) as an important tool for asset owners that aren’t cashing out of their equipment, but rather seeking a way to maximize their investment...

Utilizing a long term ground lease on real estate owned by a party related to the taxpayer can enable a taxpayer to invest proceeds into making improvements on that property. In a recent blog post we discussed build-to-suit and property improvement exchanges.  As that post made clear, a taxpayer cannot do improvements on property that is already owned by the taxpayer. Another post pertaining to exchange transactions between related parties underscored the admonition against a taxpayer acquiring replacement property from a related party.  Merging these two issues provides an opportunity for us to discuss the potential of a taxpayer using exchange proceeds to improve a property owned by a related party.

This type of transaction is made possible by introducing a long term lease for the property into the ownership structure of the land.  For 1031 exchange purposes, a long term lease is defined as a lease with 30 years or more to run, including renewal options.

It is not unusual for owner/operators of heavy equipment to put off accounting projects in favor of their core business activities, as those core activities are typically their primary revenue drivers.  Some equipment owners wait until after they have sold equipment before exploring deferring taxable gain recognition using Section 1031 like-kind exchanges.  This is a potentially huge mistake, as like-kind exchanges are a document and deadline driven process requiring that certain actions occur prior to the legal ownership transfer of the owner’s...