Can You Do a 1031 Exchange With Stocks?
Clarify whether stock investments are eligible for 1031 exchanges and learn about their specific tax treatment.
A 1031 exchange is a method for deferring capital gains taxes, common in real estate investment. Many investors wonder if this tax deferral strategy applies to stock investments. Understanding the rules governing 1031 exchanges clarifies why this tax treatment is not available for securities.
Understanding 1031 Exchanges and Eligible Property
A 1031 exchange, also known as a like-kind exchange, is a provision under Section 1031 of the Internal Revenue Code. It allows investors to defer capital gains taxes when exchanging one investment property for another property of a “like-kind.” This provision encourages reinvestment in productive assets rather than triggering immediate tax liabilities upon sale.
The “like-kind” requirement specifies that both the relinquished and replacement properties must be real property held for productive use in a trade or business or for investment. This definition is broad for real estate, allowing various types of real property to be exchanged. For instance, an investor could exchange raw land for an apartment building, a commercial property for a rental home, or a multifamily property for an industrial building. Properties must be real estate and held for business or investment purposes, not for personal use like a primary residence.
Why Stocks Do Not Qualify for 1031 Exchanges
Based on the definition of eligible property, stocks and other securities do not qualify for a 1031 exchange. The Internal Revenue Service (IRS) excludes these financial instruments from like-kind exchange treatment. This is because stocks and similar securities are considered personal property, fundamentally different from real property.
The Tax Cuts and Jobs Act of 2017 (TCJA) narrowed the scope of 1031 exchanges, limiting them exclusively to real property as of January 1, 2018. Prior to this change, certain types of personal property could qualify. However, this is no longer the case. Stocks cannot be exchanged under Section 1031.
Tax Treatment for Stock Investments
Since 1031 exchanges are not an option for stock investments, understanding their tax implications upon sale is important. When an investor sells stocks, any profit realized is subject to capital gains tax. The tax rate applied depends on how long the stock was held.
Profits from selling stocks held for one year or less are short-term capital gains, taxed at ordinary income tax rates. These rates align with an individual’s regular income tax bracket, ranging from 10% to 37% for the 2024 and 2025 tax years. Profits from selling stocks held for more than one year are long-term capital gains, with preferential tax rates of 0%, 15%, or 20%, depending on the taxpayer’s overall taxable income.
If an investor incurs a loss from selling stock, these capital losses can offset capital gains. If total capital losses exceed capital gains, a taxpayer can deduct up to $3,000 of the net capital loss against other ordinary income in a given year ($1,500 if married filing separately). Any remaining net capital loss can be carried forward indefinitely to offset capital gains or up to $3,000 of ordinary income in future tax years.