Does Gold Qualify for a 1031 Exchange?

Posted by Sebastian Abrigo on Sep 17, 2022

As an investor, using a 1031 exchange to defer the payment of capital gains taxes when you sell property is often a goal. After all, doing so can increase your funds for reinvestment, thus enabling you to better leverage your investment power. Sequential exchanges can compound this effect, helping you grow your portfolio. For many investors, it's a rational approach.

That's one reason taxpayers in the past may have tried to stretch the margins of what kinds of property they could exchange, including collectibles, intellectual property, and valuable metals. Gains from the sale of stocks and securities have never been qualified for an exchange, but other property has in some cases. Before the passage and implementation of the Tax Cuts and Jobs Act (TCJA), items including coins, artwork, and even antiques were sometimes approved for exchanges.

However, even before the IRS tightened the parameters, they maintained some restrictions. For example, in prior rulings, they rebuffed efforts to exchange gold for silver as not being "like-kind" and even disallowed the exchange of gold coins for gold bullion.

The TCJA excluded everything except real estate.

After the passage of the TCJA, the IRS reviewed the 1031 exchange and released clarifying rulings, including REG-117589-18, which explained the statutory limitations on like-kind exchanges. The Regulation defines real property as land, land improvements, unsevered crops, natural products of the land, and water and air space adjacent to the ground. The definition includes permanent structures like roads and bridges.

How does a 1031 exchange work?

For a taxpayer who owns real estate, the tool can be helpful. For example, suppose you own an apartment building in one state but would prefer to shift your focus to another area. Or perhaps you have decided that you would rather own industrial property and eliminate residential assets from your portfolio. Then, if you sell the apartment building, you will owe capital gains taxes on the difference between what you paid (your basis) and what you can sell it for (the value).

For example, if you bought the apartment building for $500,000 and now it’s worth $1,000,000, that is an increase of $500,000 (there are adjustments to the basis to consider as well). Depending on your income, your tax bill could be as much as $100,000 (let's assume you have owned this property for more than a year and qualify for long-term capital tax rates). By executing a 1031 exchange, you could defer the tax payment and reinvest the entire $500,000 profit.

You can repeat the exchange transaction.

Using a 1031 exchange does not eliminate the capital gains tax. If you late sell the replacement property, you will owe capital gains tax on that plus the deferred tax on the original asset. However, if you continue to defer the tax until you bequeath the asset to an heir, you can avoid the tax. That is possible since the heir will receive the property at a stepped-up value (the value at the time of your death) with no tax due for the prior gains.

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.

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.

Examples are hypothetical and for illustrative purposes only. Withdrawal strategies should take into account the investment objectives, financial situation and particular needs of the individual.

Costs associated with a 1031 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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