Like-Kind Property
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Like-Kind Property
The properties involved in a 1031 Exchange must be considered “like-kind” by the IRS. This generally means that they must be real estate properties held for investment or rental purposes or used for business purposes. Like-Kind Property is real estate that satisfies the Qualified Use requirements, set forth by IRC §1031, regardless of asset class.
Some examples of real estate property that qualify are:
- Single Family Residential
- Multi-Family Property
- Office Buildings
- Retail/Shopping Centers
- Commercial Property
- Industrial Warehouses
- Farmland
- Undeveloped Or Raw Land Held For Investment
- Tenant-In-Common Investment Properties
- DST Properties
Some examples of property that do NOT qualify are:
- Primary Residence Property
- Property Held For Personal Use
- Second Homes/Family Vacation Homes
- Certificate Of Trust Or Beneficial Interest
- Property Held For The Purpose Of Resale (Development, Flip, Condo Conversions)
- Securities (Stock, Bonds, Funds, Notes, REITS)
- Interests In A Company, Partnership Or Membership
The 1031 Exchange is part of the Internal Revenue Tax Code. It is a national tax law. Therefore, an exchangor can sell any qualifying property located in the US in exchange for any qualifying property located within the US. The properties do NOT have to be located in the same states. Anywhere in the US in exchange for anywhere in the US. The taxpayer cannot exchange property located outside of the US in exchange for property located inside the US.
Tax Entity
The tax entity must remain the same throughout the 1031 Exchange process. This means that the same tax payer ID to sell their relinquished property must be the same tax entity to purchase the replacement property. There are a number of allowances to this entity rule. For example, a married couple who files a joint tax return in a community property state can hold title to the replacement property in a joint tenancy or tenancy by the entirety, even if they held title to the relinquished property in only one of the spouse’s name. (Rev. Proc. 2002-69) Another example for LLCs – a single-member LLC can hold title to the replacement property, even if the taxpayer held title to the relinquished property in their own name.
Taxpayers should consult with their tax advisor to ensure that they are compliant with 1031 Exchange entity issue.
