If you remember reading our previous article “What is a 1031 Exchange?” you’ll remember that a 1031 exchange also known as the U.S. Internal Revenue Service Code 1031, states that investors of commercial properties can sell their property and reinvest those funds into a “like-kind” property. Essentially allowing investors to “defer capital gain taxes as well as facilitate significant portfolio growth and increase return on investment.” If you’re new to the topic you can catch up on 1031 exchanges here.
For those of you who are a little more familiar with the idea, keep on reading because we’ve got news for you! Some countries don’t participate in 1031 exchanges, by this we mean that they don’t have anything similar to a “like-kind” exchange code like we do here in the US.
We’ve recently asked ourselves, “do other countries have something equivalent to our 1031 exchange?” Especially our neighbors up North, Canada and the answer is no, well…not really.
What we found is that no actual equivalent exists. There was once talk about creating such a code by the Canadian Government during a previous election, but nothing came to fruition.
What does exist is the Canadian Replacement Property rule under Section 44, which many at times confuse to be similar to our 1031 Exchange rule when in reality the two differ. Section 44 of the Canadian Income Tax Act states that
“a taxpayer may defer gain on a sale by rolling into a replacement property, provided the existing property was stolen, expropriated by government, destroyed, and/or used by the taxpayer to generate income (including rental income) for a business. The seller should acquire another property in place of the disposed property within a certain time period. This should be similar to the disposed property, or used for the same purpose in order to qualify fo the tax deferral of the gain (by reducing the tax cost of the replacement property) realized on the former property.”
So how do the two differ? When it comes to the United State’s 1031 Exchange a taxpayer will not recognize any gain or loss on the exchange of one property for another like-kind property. When one exchanges a property for a like-kind property they are essentially holding on to the original investment rather than disposing of one property for another. 1031 Exchanges is much broader than the Canadian Section 44 or 44.1 which extends to include rental properties as well. This can become difficult for Canadians owning properties in the U.S. who are trying to benefit tax-wise by replacing a property.
But before you consider participating in a 1031 Exchange (if you own property in the U.S.) or a Section 44 (if you own property in Canada) make sure you consult a tax professional who can help you better understand your options.
To learn more about the differences between 1031 Exchanges and Section 44, check out these awesome resources: