A strength of Section 1031, the Internal Revenue Code that enables 1031 exchanges, is the flexibility of “like-kind” when it comes to real property. In a 1031 exchange, you must acquire like-kind property, but any real property can be exchanged for any other kind. Like-kind refers to the nature 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 74 condos to buy one apartment complex or sell one farm and buy 53 single-family rentals. (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 the District of Columbia). Temporary regulations issued in early 2006 make it possible to acquire income-producing 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 a U.S. taxpayer owns may be exchanged for other property held outside the U.S.
Some Examples of Like-Kind Property
The following are examples of real property that may be exchanged if used for business or investment. Many examples are apparent, but others will likely surprise you.
- Vacant land
- Commercial properties, including office buildings, warehouses, industrial parks
- Residential rental properties, including single-family rentals, duplexes, triplexes, NYC co-ops, apartment buildings and complexes
- Retail properties, including Triple Net Lease (NNN) properties, storefront 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 by multiple parties without a partnership)
- Cell tower or billboard easements
- Oil and gas royalties
- Perpetual water rights (as long as the state where they are located considers them to be real property)
- Interests in a Delaware Statutory Trust (DST)
- New Jersey Pineland Credits
- Air rights
- Timber rights
The bottom line is that any kind of real property can qualify if it is held for business use or investment. What does not work are builder lots, spec homes, dealer inventory, or any property acquired to sell quickly, such as a flip. Personal use properties, such as a primary residence or vacation home, are also ineligible.
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.
A 1031 exchange provides the flexibility to help you accomplish your long-term objectives. The Exchange Team at 1031 CORP. keeps the exchange process simple for you.
