Charles Woodson - How To Defer Tax On Gains

When a sale of a business or investment property results in a gain, the seller is typically taxed on that gain during the year of the sale, even when the gain was generated over many years. However, the tax code provides opportunities to spread this gain over several years, to postpone it by deferring the gain into another property, or to simply defer it for a specified period of time. These arrangements can be accomplished by selling the property in an installment sale, by exchanging the property for another, or by investing in a qualified opportunity fund. As with all tax strategies, these options have unique requirements. The following is an overview of what tax law says about these strategies.

Tax-Deferred Exchange – Many people refer to this arrangement as a “tax-free exchange,” but the gain is not actually tax-free; rather, it is deferred into another property. The gain will eventually be taxed when that property is sold (or will be deferred again in another exchange). These arrangements are also known as “1031 exchanges,” in reference to the tax code section that authorizes them: IRC Sec. 1031.

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