Property exchange is a legal alternative to the regular purchase and sale of property, usually providing the taxpayer or property owner with an income tax break. While the proceeds from the sale of a property are subject to taxation by the U.S. government, an exchange circumvents this by “trading” one property for another, thus eliminating any taxable gains from the transaction.
Some of the most common concepts involved in property exchange include:
1031 Exchange. A 1031 exchange allows a taxpayer to exchange a current property for a similar replacement property. Because the money involved in this transaction passes through the hands of a qualified intermediary, and all proceeds from the sale of the first property are invested in the replacement property, there are no taxable gains in a 1031 exchange.
Like-Kind Exchange. A like-kind exchange is the same thing as a 1031 exchange. It refers to the exchange of similar types of property, or "like-kind" property. For example, the exchange of one building (real property) for another building (also real property).
Boot. "Boot" or "Boot Received" refers to taxable property or gain received (usually unintentionally) as the result of a 1031 exchange.
Do I need a real estate lawyer for my property exchange issue?
Real estate lawyers can help you determine whether or not your property is qualified property, whether or not you can file for a 1031 exchange, and how to avoid receiving boot as a result of such an exchange. In the case that you are unfairly taxed for an exchange or penalized for failing to pay a tax that resulted from a property exchange, you may require a lawyer to represent you before the IRS.