On this Free for All Friday, we are discussing the flexibility of “like-kind” when it comes to real property. In a 1031 tax-deferred exchange, you must acquire like-kind property but any kind of real property can be exchanged for any other kind of real property. Like-kind refers to the natural or character of the property not the specific type of property. What makes real property like-kind to another is that they are held for productive use in a trade or business or for investment.
There is also flexibility in the number of properties you can sell or purchase. For example, you can sell 34 condos to buy one replacement property apartment complex or sell one farm and buy 55 rental homes. (Yes, both are real examples of exchanges handled by 1031 CORP.!)
Location, Location, Location
When exchanging a property located in the United States a replacement property located in the United States must be acquired. The properties can be located anywhere within the United States (50 states or District of Columbia). Temporary regulations issued in early 2006 make it possible for the acquisition of replacement property in the U.S. Virgin Islands, Guam or the North Mariana Islands. [Temp Reg Sec. 1.935-1T(c)(1)(ii)(E)]
A little known fact is that qualifying foreign property owned by a U.S. taxpayer may be exchanged for other like-kind property held outside the U.S.
Some Examples of Like-Kind Property
Following are just some examples of real property. Many examples are obvious but others will likely surprise you.
- Vacant land
- Commercial properties including office buildings, warehouses, industrial parks
- Residential rental properties including single family homes, duplexes, triplexes, NYC co-ops, apartment buildings and complexes
- Retail properties including Triple Net Lease (NNN) properties, store front properties, restaurants and shopping malls
- Farms and ranches
- Bed & breakfasts
- 30-year leasehold interests, including options
- Utility easements
- Conservation easements
- A tenant-in-common (TIC) interest (property owned with another party without a partnership)
- Cell tower or billboard easements
- Oil and gas royalties
- Perpetual water rights (as long the state where they are located considers them to be real property)
- Interests a Delaware Statutory Trust (DST)
Bottom line is that any kind of real property can qualify as long as it is held for business use or investment. What does not work are builder lots, spec homes and dealer property or any property acquired with the intention to sell quickly, such as flip.
This flexibility provides the opportunity to diversify the types of property you own or the location of them. It allows you to consolidate properties or acquire replacements with a higher cash flow. They also enable you to exchange into property with less management.