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1031 Exchange Explained

IRC Section 1031 provides that no gain or loss will be recognized on the exchange of any type of business use or investment investment property for any other business use or investment investment property. This means that a 1031 exchange is a rollover of equity of like investment properties, rather than an avoidance of tax and allows for the transaction to take place with full tax benefits attached. The theory behind IRC section 1031 is that when a property owner has reinvested the sale proceeds into another investment property, the economic gain has not been realized in a way that generates funds to pay any tax. In other words, the taxpayer's investment is still the same, only the form has changed (e. g. vacant land exchanged for apartment building). Therefore, it would be unfair to force the taxpayer to pay tax on a paper gain.

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