Both properties must be held for use in a trade or business or for investment. Property used primarily for personal use, like a primary residence or a second home or vacation home, does not qualify for like-kind exchange treatment.
Which properties do not qualify for tax-deferred exchange treatment?
Under IRC §1031, the following properties do not qualify for tax-deferred exchange treatment: Stock in trade or other property held primarily for sale (i.e. property held by a developer, “flipper” or other dealer)
Does an exchange of real property qualify as a like-kind exchange?
An exchange of real property held primarily for sale still does not qualify as a like-kind exchange.
Do like-kind exchanges qualify for non-recognition of gain or loss?
Thus, effective January 1, 2018, exchanges of machinery, equipment, vehicles, artwork, collectibles, patents and other intellectual property and intangible business assets generally do not qualify for non-recognition of gain or loss as like-kind exchanges.
What types of properties can be exchanged?
Following are examples of qualifying properties that could be exchanged: Fee simple interest in real estate for a 30-year leasehold or a Tenant-in-Common interest in real estate Residential, Commercial, Industrial or Retail rental properties for any other real estate
Which type of property does not qualify for 1031 exchange?
Under the Tax Cuts and Jobs Act, Section 1031 now applies only to exchanges of real property and not to exchanges of personal or intangible property. An exchange of real property held primarily for sale still does not qualify as a like-kind exchange.
What Cannot be used in a like-kind property exchange?
Securities, stocks, bonds, partnership interests, and other financial assets are excluded from the definition of like-kind property.
What type of property is eligible for like-kind exchange treatment?
As mentioned, a 1031 exchange is reserved for property held for productive use in a trade or business or for investment. This means that any real property held for investment purposes can qualify for 1031 treatment, such as an apartment building, a vacant lot, a commercial building, or even a single-family residence.
When can you not do a 1031 exchange?
The two most common situations we encounter which are ineligible for exchange are the sale of a primary residence and “flippers”. Both are excluded for the same reason: In order to be eligible for a 1031 exchange, the relinquished property must have been held for productive in a trade or business or for investment.
Can I do a 1031 exchange on a rental property?
Rental properties have many great benefits including favorable tax benefits with the IRS. Not only can you depreciate rental properties to save on taxes, but a 1031 exchange allows you to sell a rental property and defer the taxes on any profit you make or recaptured depreciation.
Does a vacation home qualify for 1031 exchange?
You can sell your vacation home through a 1031 exchange as long as you rented it for more than 14 days per year and your personal use was no more than 14 days per year (and less than 10% of the total nights rented) over the two years leading up to the sale.
What qualifies as like-kind property?
According to the IRS, like-kind property is defined as: “Like-kind property is property of the same nature, character or class. Quality or grade does not matter. Most real estate will be like-kind to other real estate.
Can I do a like-kind exchange on my primary residence?
Normally the IRS does not allow you to conduct a 1031 exchange with your primary residence. That's because the home that you live in isn't being used as an investment property or being held for business purposes. Instead, your primary residence is used to provide shelter for your family.
Can you sell vacant land in a 1031 exchange?
Vacant land held for sale is not eligible for a 1031 exchange. For example, buying a property to do improvements and then selling at a higher price (property flipping). Vacant land also cannot be used to build the taxpayer's primary residence.
What is the three property rule in a 1031 exchange?
The Three Property Rule is defined under IRC Section 1031, which states that an exchanger or taxpayer executing a delayed exchange has 45 calendar days from the closing date of the sale of their relinquished property to formally identify a replacement property or properties.
How long does a property have to be a rental for a 1031 exchange?
As long as you are holding the property for investment purposes and are not using them primarily for personal use, you can wait to rent either property until you complete improvements. You note that one property is a vacation home.
What is a like kind exchange?
Like-kind exchanges -- when you exchange real property used for business or held as an investment solely for other business or investment property that is the same type or “like-kind” -- have long been permitted under the Internal Revenue Code.
What is a like kind property?
Like-Kind Property. Properties are of like-kind if they’re of the same nature or character, even if they differ in grade or quality. Real properties generally are of like-kind, regardless of whether they’re improved or unimproved. For example, an apartment building would generally be like-kind to another apartment building.
When does 1031 apply?
A transition rule in the new law provides that Section 1031 applies to a qualifying exchange of personal or intangible property if the taxpayer disposed of the exchanged property on or before December 31, 2017, or received replacement property on or before that date .
Is a like-kind exchange considered a gain or loss?
Thus, effective January 1, 2018, exchanges of machinery, equipment, vehicles, artwork, collectibles, patents and other intellectual property and intangible business assets generally do not qualify for non-recognition of gain or loss as like-kind exchanges. However, certain exchanges of mutual ditch, reservoir or irrigation stock are still eligible ...
Do you have to recognize a gain or loss in a like-kind exchange?
Generally, if you make a like-kind exchange, you are not required to recognize a gain or loss under Internal Revenue Code Section 1031. If, as part of the exchange, you also receive other (not like-kind) property or money, you must recognize a gain to the extent of the other property and money received.
Is an apartment building like-kind?
For example, an apartment building would generally be like-kind to another apartment building . However, real property in the United States is not like-kind to real property outside the United States.
Can you recognize a loss in 1031?
You can’t recognize a loss. Under the Tax Cuts and Jobs Act, Section 1031 now applies only to exchanges of real property and not to exchanges of personal or intangible property.
What is a like kind property?
The term “like-kind” refers to the nature or character of the property not its grade or quality.
What is like kind in real estate?
The term “like-kind” refers to the nature or character of the property, ignoring differences of grade or quality. For example, unimproved real property is considered like-kind to improved real property, because the lack of improvements is a distinction of grade or quality; the basic real estate nature of both parcels is the same. Treas.
What is the purpose of the exchanger holding the replacement property?
Both the Relinquished and the Replacement Properties must be held by the Exchanger either for investment purposes or for productive use in a trade or business. The Exchanger’s purpose and intent in holding the property is the critical test. The use of the property by other parties to the exchange ...
Can you sell a real property interest as a replacement?
Therefore, if you are selling a real property interest (anything that you have fee title to) you can look for any kind of real property as a replacement property.
Defining Like-Kind Requirements
There are many requirements to ensure a compliant 1031 exchange. Potential exchangers frequently pose questions on what property is considered "like-kind" to another property. Generally, any type of genuine property interest is like‐kind to any other type of real property. The properties do not have to be of the same nature.
Examples of Property that are not Like-Kind
In simple terms, the taxpayer must use both properties involved in exchange for trade, business, or investment purposes. So, for example, although a personal residence or a vacation home is real estate, it would not qualify for exchange treatment since it is held for personal use and not for investment.
Like-Kind Examples
Based on these provisions, like-kind is defined in the tax code quite liberally in that any real estate is like-kind to any other type of real estate. For example, whether the real estate is improved or unimproved is not significant. Many court cases and rulings have addressed the like-kind standard for real property.
Summary
Like-kind real estate are assets of the exact nature or character, irrespective of class or quality, one can exchange that without realizing tax liability under Section 1031