1031 Exchange, Like-Kind Exchange, and Starker Exchange — The US Virgin Islands are eligible to participate in 1031 tax-deferred property exchanges. If you own investment or rental property, a 1031 exchange could enable you to defer tax liability from the property's sale if the funds are used to reinvest in a second property of a "like-kind." You could use the 1031 exchange to acquire investment opportunities in the US Virgin Islands.
Benefits of a 1031 ExchangeWhen you sell an investment property, you will be required to pay a capital gains tax on your profits at either a short-term or long-term capital gains rate. If you instead, reinvest profits from the sale in a like-kind property of the same or greater value, Internal Revenue Code Section 1031 provides for you to defer the tax liability. This opens up possibilities for investors looking to diversify or move markets entirely -- including stateside investors seeking opportunities in the US Virgin Islands. Other advantages to a tax-deferred exchange include:
- The potential to increase investment income by moving to more profitable real estate markets.
- Property consolidation for those seeking to consolidate multiple investment properties into a single property.
- Market diversification for those seeking to convert one investment property into multiple properties across various locations.
- Exchanging one type of investment property for another kind of investment property (i.e. land in exchange for a single-family home)
1031 Basic QualificationsInternal Revenue Code Section 1031(a)(1) states: “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 the property is exchanged solely for property of a like kind that is to be held either for productive use in a trade or business or for investment.” Any real estate primarily held for investment, or held for productive use in a business, may be eligible for a 1031 exchange with these basic qualifications:
- The new investment property must be of "like-kind" to the property being sold.
- A personal residence will not qualify for the exchange, but a vacation home used predominantly as a rental property could qualify.
- The like-kind property to be purchased must be identified within 45 days; the purchase must be completed within 180 days after the sale of the original property.
- A Qualified Intermediary must ensure that all eligibility requirements are adhered to. For instance, the investor must not have access to funds from the sale during the period of exchange, and a third-party Qualified Intermediary will hold the funds in an interest bearing account.
- There are limitations on the amount of capital gain that may be tax deferred.