Accounting Articles > Real Estate Taxation:

1031 Exchange, Starker Exchange, Like-Kind Exchange, or Tax Free Exchange

Accounting for these exchanges is all the same concept under the Internal Revenue Service code. Very basically it’s a trade of real property where the capital gain is deferred.

Example:

If you have a factory building where your basis is the $300,000 you paid for it, and you’re selling the property for $1,000,000. You do not have to pay capital gains tax on the transaction as long as roughly the $700,000 is traded into another piece of real property in an acceptable period of time. After the sale of the initial property you will have 45 days to identify the property and 180 days to close. These periods run concurrently. During this period, the excess money from the first transaction is held in a trust account. Most transaction of real estate qualify for this type of exchange.

The whole point is that you’re trading real property and the money isn’t going to you, so it generally isn’t taxed. When you sell the property, and the money comes to you, then the gain will be taxed.

When talking about exchanges, we’re not talking about your personal residence. There is a lifetime exclusion of $500,000 on gains from personal residences as long as you can establish a residency period of more than two years.

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