The IRC Section 1031 Exchange is one of the most powerful tax saving and wealth building tools available for people selling highly appreciated real estate. A properly structured 1031 exchange allows a family selling a farm or ranch to sell land, to reinvest the proceeds in other “like-kind” real estate, and to defer capital gain taxes.
To quote the tax code, IRC Section 1031 (a)(1) states: "No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment."
Effective January 1, 2013, capital gains tax rates have increased, making tax-saving strategies such as the 1031 Exchange and Charitable Remainder Trust even more advantageous. In addition to higher capital gain tax rates, there is a new 3.8% healthcare tax on investment income including income from the sale of real estate.
There are many potential benefits for a taxpayer who successfully executes a 1031 exchange. Some of these include: