FAQ
Tax-free exchanges (1031)-B
The term "Tax Free exchange" is a reference to Internal Revenue Code Section 1031. This section of the law allows taxpayers to trade one piece of property for another without paying federal income taxes on the transaction provided certain qualifications (discussed below) are met. To put it another way, a taxpayer selling an old piece of property is able to defer the federal income taxes that they would have paid on the sale of that old property into the purchase of new property if they follow the rules of the code section.
What are the advantages of a Tax Free exchange?
The advantage of using a Tax Free exchange is the deferral of the tax. This allows a taxpayer to have more cash available to invest in the replacement property. For example, if the taxpayer is selling a piece of equipment that has a $20,000 gain and is in a 30% federal tax bracket, the taxpayer has approximately $4,500 ($20,000 @ 30% less fees related to the exchange) more cash to invest in the replacement property since the taxes are deferred until the replacement property is sold. In terms of state tax, some states have full conformity with federal income tax law while other states do not. You will need to look at the specific state you are concerned with to answer that question.
What are the requirements for a Tax Free exchange?
The Code does have specific time sensitive deadlines that MUST be respected as well as specific restrictions on how the sales proceeds must be handled. That is why you need a Qualified Intermediary to assist with the transaction. A sale and a reinvestment in replacement property can be converted into a Tax Free exchange by means of an exchange agreement and the services of a Qualified Intermediary.
What is IronPlanet's role in a Tax Free exchange?
What is a qualified intermediary?
A "Qualified Intermediary" conducts the Tax Free exchange. Internal Revenue Code regulations contain a very specific definition of a Qualified Intermediary. The Qualified Intermediary is bonded and holds money from the sale of an asset in a bank trust account on the behalf of the client until the client has found replacement property within the set time limits. The Qualified Intermediary will then complete the transaction for the client and will use the funds in the trust account to pay for the replacement property.
Can I still use a Tax Free exchange if I purchase the replacement piece first?
When Do I Need To Start The Process?
What are the costs of this service?