Additional Guidance on Section 1245 Real Property Exchanges

We add some more examples on how Section 1245 Real Property Exchanges work

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We have received some questions on how the taxation of a Section 1245 real property exchange works and, in this post, we will review some examples to provide more guidance.

Investing in Section 1245 real property is always a valid Section 1031 exchange; however, the issue is whether you can defer all of the gain or not. Section 1245 requires the taxpayer to reinvest equal or greater sums into other Section 1245 real property to fully defer the Section 1245 gain.

The taxpayer may end up reinvesting the full proceeds from the sale of their relinquished property into other real estate, however, part of the reinvestment may be gain required to be reported, but it does not blow up the exchange. The taxpayer is still reinvesting real property for real property.

Let’s look at some examples: