What Property Does Not Qualify For A 1031 Exchange?

A 1031 exchange is a powerful tool to help defer capital gains taxes and build wealth. When done correctly, it allows an investor to sell business or investment property and avoid the immediate payment of taxes on any profit. However, if done wrong, any tax benefit can be quickly lost. One way to mess up an exchange? Trying to exchange the wrong type of property.

First, let’s start with what does qualify for a 1031 exchange. Any property that you hold for productive use in a trade or business or for investment qualifies for an exchange. So far, so good. Sounds reasonable.

But, the tax code goes on to explicitly exclude some property, even if it is used in trade or business or for investment. This includes property like stocks, bonds, securities, interests in partnerships and notes.

Then, further exclusions are noted. Any property you’re holding primarily for sale is also excluded. This includes any business inventory or real estate that you bought with the intention to sell (e.g. flipping). It can also include vacant land that you purchased with the intention to build a house and sell as a complete package. In these circumstances, investors who “turn” residential properties might be considered a dealer.

Finally, your private residence does not usually qualify for a 1031 exchange. Why? Because it is not usually used in trade or business or for investment purposes. There is one exception. If you do you a portion of your primary residence for one of the above reasons, then the portion you use may be eligible for exchange treatment.

As you can see, there are many technicalities with the tax code when it comes to 1031 exchanges. This is why it is important to work with an experienced exchange professional when completing your exchange.

To find out how we can help you find and close on your next 1031 exchange property or to learn more about the exchange process and our qualified intermediary services, please visit our website.