Can You Exchange Everything With Section 1031?

As more and more non-professional investors move into the world of #1031 exchanges, one of the most common questions asked is what property qualifies under the tax code. While it seems straightforward as to what types of property qualify, too many unwary investors have had their 1031 exchange declined by the IRS for failing to satisfy this basic requirement.

Step one in any potential 1031 exchange is ensuring that the relinquished property meets the requirements of being “qualified property” under the rules. By definition, qualifying property is property (or equipment) used in a taxpayer’s business or trade or held for investment purposes. Property used in business or trade can include either the equipment used or the physical building where the trade or business is conducted.

Whether the relinquished property is real estate or equipment, it must always be replaced with something that is “like-kind” in order to qualify for a 1031 exchange. For example, relinquished real estate must be replaced with like-kind real estate, and relinquished property must be replaced with like-kind equipment.

It is important to note, however, that some property will never qualify for a 1031 exchange (not even if the investor considers it part of their business or trade), including:

• A personal residence
• Land under development for resale
• Property purchased for resale
• Fix/flips or construction for resale
• Inventory
• Partnership or LLC membership interests
• Corporation common stock, bonds or notes

Finally, to satisfy all aspects of a 1031 exchange, the qualifying replacement property must be taken in the same name as the qualifying relinquished property.

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If a 1031 exchange is in your future, visit our website to learn more about these powerful tax deferral tools and our qualified intermediary and replacement property locator services.