Did you know that 1031 exchanges aren’t just for real estate? In fact, you can exchange much more than you might think. For example, a farmer could exchange a herd of cows for another type of livestock, and in doing so defer capital gains tax. How is this possible?
Section 1031 of the US tax code allows the deferral of capital gains and recapture taxes on many assets other than real estate. Like what? Some of the most common non-real estate exchanges involve airplanes, boats, heavy equipment, collectibles, art, and yes—even livestock.
The main concept to remember is the term “like-kind.” According to the IRS, the asset intended for exchange must be exchanged for an asset that is “the same nature or character.” In addition, both assets “must also be used in a trade or business or held for investment.” For instance, a collector could exchange a Picasso painting for a Vincent van Gogh one, and still defer any capital gains tax.
As in the case of real estate, strict 1031 rules apply to non-real estate exchanges. The 45-day identification period and the 180-day closing period must still be adhered to for non-real estate exchanges. Additionally, a qualified intermediary must be used to hold the exchange funds in order to comply with IRS regulations.
If you’re considering a non-real estate exchange, be sure to review all of the rules regarding tax-deferred exchanges, and speak with a financial planner to ensure it is is the right investment opportunity for you.
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