real estate exchange

If two parties were to exchange parcels of real estate even up, say two houses, or a house and a parcel of developed land, how would they avoid any adverse tax consequences? What is a 1031 tax free exchange?

Following is an excerpt from IRS Publication 17. The excerpt gives a simple explanation of the rules for qualification. However, to be sure on this, I would suggest you go to the IRS site [url]http://www.irs.ustreas.gov/forms_pubs/index.html[/url] and download Publication 544, Sales and Other Dispositions of Assets. That Publication has more detail about the rules and the exceptions.

Under Sec. 1031, if you trade business or investment property for other business or investment property of a like kind, you do not pay tax on any gain or deduct any loss until you sell or dispose of the property you receive.

To be nontaxable, a trade must meet all six of the following conditions.

The property must be business or investment property. You must hold both the property you trade and the property you receive for productive use in your trade or business or for investment. Neither property may be property used for personal purposes, such as your home or family car.

The property must not be held primarily for sale. The property you trade and the property you receive must not be property you sell to customers, such as merchandise.

The property must not be stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest, including partnership interests. However, you can have a nontaxable trade of corporate stocks under a different rule, as discussed later.

There must be a trade of like property. The trade of real estate for real estate, or personal property for similar personal property, is a trade of like property. The trade of an apartment house for a store building, or a panel truck for a pickup truck, is a trade of like property. The trade of a piece of machinery for a store building is not a trade of like property. Real property located in the United States and real property located outside the United States are not like property. Also, personal property used predominantly within the United States and personal property used predominantly outside the United States are not like property.

The property to be received must be identified within 45 days after the date you transfer the property given up in the trade.

The property to be received must be received by the earlier of: (1) The 180th day after the date on which you transfer the property given up in the trade, or (2) The due date, including extensions, for your tax return for the year in which the transfer of the property given up occurs.