How does the tax deferral of Section 1031 work?
The tax code provides that the gain on disposition of certain types of property is not recognized (this is known as “non-recognition treatment”) if that property is exchanged for property of a like-kind. In general terms, the taxpayer disposes of his or her currently owned property (the “relinquished property”) for other property acquired in the exchange (the “replacement property”). The value of the replacement property must be equal to or greater that the value of the property relinquished in the exchange in order to obtain complete tax deferral. Value, for these purposes is generally the purchase price, adjusted for bona fide closing costs. For example, if a taxpayer relinquishes property for a purchase price of $100,000.00 and incurs closing costs of $7,500.00, that taxpayer must acquire replacement property having a value of $92,500.00 (the purchase price less the closing costs). The value of property acquired is the purchase price of the replacement property plus the closing cost
