Can You Do a 1031 Exchange with Stocks?

Can You Do a 1031 Exchange with Stocks?

Posted by on Oct 4, 2021

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Regardless of the type of investments that you’re making, it’s beneficial that you understand how to legally apply tax breaks to keep more money in your pocket. If you’ve been investing for a while, you may already know about the options available to you, but if you’re a new investor, it’s a good idea to educate yourself on what tax breaks you can apply to different investments.

One way to potentially defer taxes is a 1031 exchange, which allows investors to defer capital gains by exchanging one investment property for another. Even though 1031 exchanges were originally created for real estate investments, many investors still wonder if they can use this tool for stocks and other investments.

 

What Is a 1031 Exchange?

A 1031 exchange is a tool used by real estate investors to defer capital gains taxes generated by the sale of their investment properties. Under a 1031 exchange, an investor can exchange an investment property for another property that is considered “of like kind.” It’s important to note that there are several rules in place that dictate what properties qualify for a 1031 exchange, so investors can’t just use them at their own discretion in order to avoid taxation. 

Essentially, real estate investors can use a 1031 exchange (as long as both properties involved meet IRS regulations) in order to defer capital gains taxes and other taxable income associated with the property by trading their ownership in one property for ownership in another.

 

Can You Do a 1031 Exchange on Stocks?

In short, the answer to this question is no. 1031 exchanges are designated by the IRS as being specifically used for real estate investments. The law that governs 1031 exchanges was signed into effect in 1921 as part of The Revenue Act of 1921. It was most recently amended by President Donald Trump under the Tax Cuts and Job Act of 2017. Under this law, the only investments that are eligible for use in a 1031 exchange are those that meet the definition of “real property” as set forth by the IRS. 

Stocks, bonds, and other types of assets are not considered real property by the IRS. According to the IRS website, real property is defined as “land and anything built on or attached to it.” When you consider that definition, it’s obvious that stocks are not considered “real property” by the IRS, and therefore are not eligible for 1031 exchange tax deferral.

 

Are There Alternatives?

Don’t give up hope on getting a tax break on your stock investments even though you can’t use a 1031 exchange. There are alternatives like a 721 UPREIT that may be available and enable a lower tax burden. Check with your tax advisor to see if this might be an alternative for you.

While you can’t use a 1031 exchange to defer profits generated by stock, there are other tools that you have at your disposal to put you in a better position to pay less in taxes based on the success of your investments. As is always the case, you should discuss the specifics of your investments and how they relate to state and federal tax laws with a licensed accountant or other tax professional.

 

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. Costs associated with the transaction may impact investor’s returns and may outweigh the tax benefits. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities.  

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