Like Kind Exchanges - ALERT - as of January 1,2018, Section 1031 will apply only to real property - not personal property.
Most business taxpayers have traded in a vehicle on a similar, but newer, vehicle many times. In so doing, they have utilized Section 1031 of the US tax code by using the trade-in allowance to lower the new vehicle price - and deferring any tax that would have been due on the trade-in allowance if the traded vehicle was fully depreciated, in the event the vehicle would have been sold instead of traded.
Many taxpayers fail to realize that Section 1031 can be used to defer thousands of dollars in taxes when business or investment real estate is disposed of. One class of real estate asset, such as an apartment building, can be disposed of in exchange for an asset in another class, such as raw land. This is accomplished through the use of a "qualified intermediary" - a disinterested party who acts as an escrow agent until both sides of the buy/sell transaction are accomplished.
When done properly, a fully depreciated apartment house can be sold for $400,000, for example, with the 25% depreciation recapture tax and the 15% capital gains tax deferred by simply reducing the depreciable basis in the newly acquired real estate asset. Later, the newly acquired asset can be similarly disposed of in a Section 1031 exchange, deferring even more tax. Eventually, inherited assets receive a fully "stepped up" basis equal to fair market value. In this manner, the deferred taxes over many years, permanently and legally escape taxation.
HOWEVER, be cautious! The real estate bust of recent years has treated some Section 1031 taxpayers very harshly. As an example, there is the case of a joint taxpayers who sold their business for $1.5 million and reinvested the proceeds in a Tenants In Common (TIC) condo project. The project failed wiping out their $1.5 million dollars. In their desire to avoid taxes, they became destitute.
Wish to learn more - we can help by locating, realtors, buyers, sellers, intermediaries, lawyers and title agents - and advising you of proper tax treatment and pitfalls