InSight

Tax Mitigation Playbook: Who can use 1031 Exchanges?

Financial Planning Dentist

boulder financial planning experts with 1031 tax mitigation experienceSection 1031 of the tax code allows property owners to defer taxes on the sale of their real estate held for business or investment purposes. At InSight, we use this for several strategic and preference-based reasons for clients (See What is a 1031 Exchange for more) 

This is Key:

The only requirement for a person or entity to be eligible for an exchange is that it is a US tax-paying identity. All taxpayers qualify as individuals, partnerships, limited liability companies, S corporations, C corporations, and trusts. There are no citizenship requirements for an exchange, meaning that you are eligible for an exchange as long as you pay taxes to the US. 

This requirement includes DACA recipients or foreign companies. Keep in mind that the same taxpayer that sells the relinquished property must also purchase the replacement property. The same taxpayer requirement refers to tax identity, not necessarily the name on the property’s title. A taxpayer can preserve tax identity without holding title under their name by holding title under a “tax disregarded entity,” which is not considered separate from its owner for tax purposes. Entities such as a single-member LLC, a trustee of a revocable living trust, or a tenant in common are examples of a tax disregarded entity. 

Taxpayers may also hold title under a Delaware Statutory Trust (DST) which is a real estate investment vehicle that provides investors with access to investment-grade real estate that is generally larger than they could have acquired on their own. The Taxpayer acquires a fractional interest in the property. The use of DSTs in 1031 exchanges was approved by the IRS in Revenue Procedure 2004-86. Delaware Statutory Trust (DST) or Illinois Type Land Trust beneficiary. The tax gain can be deferred if tax‐deferred exchange requirements are satisfied and the sale proceeds are reinvested in like‐kind property.

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