Those planning to sell their real or personal property in India held for productive use in a trade, business or investment and invest that money in another property can benefit a lot with tax deferred exchange.

1. Defer Taxes on Property with a 1031 Exchange
Those planning to sell their real or personal property in India held for productive use in a trade,
business or investment and invest that money in another property can benefit a lot with tax deferred
exchange. Known as 1031 exchange, it considers the entire transaction as an exchange and not as a
simple sale. As per US Code Title 26, § 1031, Exchange of Property Held for Productive Use or
Investment.
“No gain or loss shall be recognized on the exchange of property held for productive use in a trade or
business or for investment if such property is exchanged solely for property of like kind which is to
be held either for productive use in a trade or business or for investment.”
However, there are exceptions. It does not apply to any exchange of:
● stock in trade or other property held primarily for sale,
● stocks, bonds, or notes,
● other securities or evidences of indebtedness or interest,
● interests in a partnership,
● certificates of trust or beneficial interests, or
● choses in action.
What makes 1031 exchange advantageous is the fact that the tax on the gain is deferred until some
future date. In normal transactions, when a property is sold, the property owner has to pay the tax for
the economic gain realized. However, in an exchange, since the property owner invests the economic
gain realized (by selling a property) in another property, there are no funds to pay the tax. Since only
the form of investment has changed, it would be unfair to force the property owner to pay the taxes.

2. However, in order to get the benefit of 1031 exchange, the property owner must indulge in an
‘exchange’ within a stipulated time frame. As per the law, the property must be identified and the
exchange be completed not more than 180 days after transfer of exchanged property.
As 1031 exchange is not tax-free but tax deferred, the property owner needs to pay the original
deferred gain and any additional gain realized since the purchase of the replacement property, when
the replacement property is finally sold.
The global taxpayers therefore must seek the help of efficient tax consulting firms to put in place
effective tax planning strategies. For instance, the tax consulting firms can help to accommodate a
1031 exchange and thereby defer the US and India capital gain taxes.
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