What is a section 351 exchange?

A transaction involving Section 351 of the Internal Revenue Code is a straightforward means for an individual to transfer property to a corporation in exchange for stock without recognizing a gain or loss. The transfer of property must be made in exchange for stock in the corporation.

What qualifies as a section 351 transfer?

Section 351(a) provides that no gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control (as defined in § 368(c)) of the corporation.

What is the definition of control for purposes of section 351?

Control means ownership of at least 80 percent of all classes of the corporation’s stock and at least 80 percent of the total voting power of all classes of stock. See Meeting the 80-Percent Control Test for Section 351 Transfers.

Under what circumstances will a realized gain and or loss be recognized on a section 351 transfer?

A realized gain is recognized on a § 351 transfer if the transferor receives “boot” in the exchange (i.e., money or property other than stock).

What financial instruments are not considered stock for purposes of section 351?

ii. For purposes of Section 351, “property” does not include services, debt of the transferee corporation not evidenced by a “security” (within the meaning of federal income tax law, not securities law), or interest on debt of the transferee corporation accrued during the transferor’s holding period for the debt.

Does 351 apply to S corps?

In the case of a contribution of appreciated property to an S corporation in order to obtain tax deferral, IRC section 351(a) requires that the transferor shareholder, along with all other shareholders making contemporaneous contributions of property, control the corporation immediately after such transfer, and IRC …

Does 351 apply to LLC?

In a section 351 transfer the seller contributes his LLC interests (or the LLC’s assets) to a new corporation, and the buyer contributes stock (or other property) to the new corporation, and if together the seller and the buyer control more than 80% of the new corporation, then the transfer is tax-free.

What benefit does the government get from allowing IRC section 351?

IRC Section 351, a broad rule applying to corporations, generally defers from taxation any gain or loss incurred on property transferred to a corporation in exchange for stock.

Why was section 351 created?

The federal government created this provision in the Internal Revenue Code to encourage the creation of corporations. It is often used by property owners who transfer their property into corporations they created themselves. Not every property-for-stock transaction is eligible for tax deferral under Section 351.

When a taxpayer transfers property subject to a mortgage?

When a taxpayer transfers property subject to a mortgage to a controlled corporation in an exchange qualifying under § 351, the transferor shareholder’s basis in stock received in the transferee corporation is increased by the amount of the mortgage on the property.

Is there any depreciation recapture under a Code Sec 351 exchange?

In a Section 351 transfer in which no boot is received and, therefore, no gain is recognized, there is no recapture of depreciation.

When determining the shareholder basis of stock received for property in a 351 transaction?

351, the transferors obtain basis in the stock of the transferee corporation equal to the basis of all property exchanged: (1) decreased by the fair market value (FMV) of any boot received and the amount of loss recognized on the exchange; and (2) increased by the amount treated as a dividend, if any, and the amount of …

Does Boot increase basis?

If you receive boot in addition to the corporation’s stock, you will often end up with a stock basis equal to your original basis in the property that you gave to the corporation. In the preceding example with Abner and his corporation, Abner’s stock basis will amount to $10,000.

What happens if you don’t use all the money in a 1031 exchange?

Do I have to spend everything on my 1031 account? No, you do not have to spend all of your funds. However any amount not spent will be considered cash boot and will be subject to capital gains taxes and any applicable recaptured depreciation.

How much of boot is taxable?

Capital gain tax on boot can be as high as 20% depending on your income bracket. Factors that can create boot include cash proceeds, mortgage reduction, non-like-kind property, and non-transactions costs such as tenant deposits. A good way to avoid mortgage boot is by purchasing more than one replacement property.

How do I avoid taxes on a 1031 exchange?

“You must reinvest all the proceeds to defer paying tax on all the gain,” said Collado. “In other words, you can’t just reinvest the gain.” For example, if you sell a property for $100,000 and the gain is $75,000, you have to reinvest the entire $100,000 worth of proceeds to avoid paying tax on the $75,000.

How long must you hold 1031 property?

If a property has been acquired through a 1031 Exchange and is later converted into a primary residence, it is necessary to hold the property for no less than five years or the sale will be fully taxable.

How long do you have to live in a house to avoid capital gains Canada?

The exemption is indexed to inflation. To claim this exemption, you, your relative, or member of your partnership must have owned the asset for at least 24 months prior to its sale and you must have been a resident of Canada when the asset was sold.

Does 1031 apply to primary residence?

Normally the IRS does not allow you to conduct a 1031 exchange with your primary residence. That’s because the home that you live in isn’t being used as an investment property or being held for business purposes. Instead, your primary residence is used to provide shelter for your family.

Can I live in my 1031 exchange property?

While you can’t do a 1031 exchange directly into a personal residence — exchanges are limited to real property that is held strictly for investment or business purposes — you can convert an investment property into personal property so long as you follow the IRS’ rules to the letter.

Can a second home be used in a 1031 exchange?

It has been established that vacation or second homes held by the Exchanger primarily for personal use do not qualify for tax deferred exchange treatment under IRC §1031.

Can I do 1031 exchange myself?

To facilitate the 1031 exchange, you will want to insert special language referencing the 1031 exchange in the Purchase & Sale Agreement for your relinquished property. You can do this yourself, if you decide to draft the agreement on your own.

Is it worth doing a 1031 exchange?

The motivation to use a 1031 exchange can be substantial. This is because investor capital that otherwise would be paid as capital gains tax is rolled over as part of the down payment into a replacement property. This provides greater investment benefits than the sold property.

What is the cost of a 1031 exchange?

around $600 to $1,200

The average costs of doing a 1031 exchange are usually around $600 to $1,200, with most of the expenses in the form of fees paid to a Qualified Intermediary. This cost is for a straightforward deferred exchange, where you sell your relinquished property and acquire a replacement property.

What is the timeline for a 1031 exchange?

Once the relinquished property sells, the taxpayer has 45 days to identify replacement property(s) and 135 days after that to finalize their exchange for a total of 180 days.

What is the most common type of 1031 exchange?

The delayed exchange

The delayed exchange is the most common form of 1031 exchanges. A delayed 1031 exchange occurs when the business or investor relinquishes the initial property before identifying and acquiring the replacement property.

How long do you have to identify a new property in a 1031 exchange?

45 days

In a typical Internal Revenue Code (IRC) §1031 delayed exchange, commonly known as a 1031 exchange or tax deferred exchange, a taxpayer has 45 days from the date of sale of the relinquished property to identify potential replacement property. This 45-day window is known as the identification period.