A 1031 Exchange refers to Section 1031 of the Internal Revenue Code, which permits the deferral of capital gains tax on the exchange of investment property. It is the formal process that executes a like-kind exchange.
How It Applies to Florida Landlords
Florida landlords utilize 1031 exchanges to trade up to larger assets or swap multiple smaller rental units for a single larger commercial building. Because the exchange is governed by federal law, it remains a powerful tool in Florida. However, it is important to remember that Florida does not have its own separate capital gains tax, so the primary benefit of a 1031 exchange here is the federal tax deferral. Landlords must avoid the 'boot'—any cash or non-like-kind property received in the transaction—as that portion will be immediately taxable.
Key Takeaways
- Governed by IRC Section 1031.
- Requires reinvesting all proceeds into a property of equal or greater value.
- Any cash taken out of the exchange (the 'boot') is subject to taxation.