Step Transaction is a term used to describe a series of transactions that are intended to achieve a tax advantage, but are not considered a legitimate 1031 exchange. A step transaction involves a series of transactions that are closely connected and intended to be treated as a single transaction, but are instead treated as separate transactions for tax purposes.
Key-Takeaway
- A step transaction is a series of transactions that are closely connected and intended to be treated as a single transaction, but are instead treated as separate transactions for tax purposes.
- Step transactions can result in the loss of the tax benefits of a 1031 exchange.
Example
Consider an investor who wants to sell a rental property and purchase a new rental property using a 1031 exchange. The investor first sells the old property to a related party for a low price and then buys the replacement property from the same related party for a higher price. This series of transactions may be considered a step transaction and not a valid 1031 exchange.
Tips
- Be aware of the rules and requirements for 1031 exchanges, including the requirement that the transaction be a legitimate exchange.
- Avoid structuring transactions in a way that could be considered a step transaction
Advice
- Seek professional guidance from a qualified intermediary and a tax advisor to ensure that your transaction meets the requirements for a 1031 exchange.
- Be aware of the potential consequences of a step transaction, including the loss of tax benefits and potential tax liabilities.
Recommendations
- Structuring a 1031 exchange as a legitimate exchange, rather than a step transaction, can help to ensure that the transaction qualifies for tax benefits.
- Take the time to understand the rules and requirements for 1031 exchanges and seek professional guidance if necessary.
