Property exchanges under section 1031

Financial Planning for Partners, LLC Members, and Shareholders of S-Corps can be challenging.  The planning, tax, and legal rules for these individuals is often dramatically different from those that apply to employees and shareholders of C-Corps.  Our firm is dedicated to helping this unique set of entrepreneurs manage their financial affairs.

Today, we want to cover a unique area of property exchanges.  It is quite common in an partnership, LLC, or S-Corp for one or more of the partners to have contributed property to the business in the form of a building or real estate.  Such contributions are often critical in the early stages of the business, but over time, there surfaces the need for another building or property and a desire to relinquish, sell, or otherwise dispose of the original building or property.

This is where the planning opportunity surfaces.  If the original building or property is simply sold and the proceeds used to purchase something new, the original contributing partner will most likely find himself with a tax bill that is less than desired. If the contributed building or property has appreciated over time, the tax bill could be quite large indeed. 

What’s the firm to do?  You need a new building or property to grow, but no one wants to hit the partner with the large tax bill.   In comes a Section 1031 Exchange to the rescue!  A 1031 Exchange allows the firm to exchange the original property for a new property in an exchange that effectively defers any recognition of gain.  We kick the tax down the road so to speak.  What is great about a properly executed 1031 Exchange is that the properties “exchanged” do not need to be for each other.  When executed with the proper “Intermediary”, you can sell your property on the open market and purchase what you want and still postpone any tax gain.

Want to learn more?  Give me a shout!

Thanks!

401kGuy aka Pete Welsh

Pete Welsh
312.404.1909