What kinds of property qualify for a 1031 exchange?
Property or equipment held for investment purposes or used in a taxpayer’s business or trade qualifies for exchange property. Property held for investment includes real estate, improved or unimproved, held for investment or income producing purposes. Property used in a taxpayer’s trade or business includes office facilities or place of doing business, as well as equipment used in the trade or business.
Both the relinquished property and the replacement property must be held for productive use in a trade or business or for investment. Property acquired for immediate resale will not qualify.
Certain types of property are specifically excluded from Section 1031 treatment:
- Property held primarily for sale
- Inventories
- Stocks, bonds or notes; other securities or evidences of indebtedness
- Partnership interests
- Certificates of Trusts or beneficial interest
- Land under development
Replacement property acquired in an exchange must be “like-kind” to the property being relinquished. Like kind generally means similar in nature and character notwithstanding differences in grade or quality. Whether real estate involved is improved or unimproved is not material because that fact relates only to the grade or quality of the property and not its kind or class. Therefore, raw land held for investment may be exchanged for single-family rentals. All qualifying real property located in the United States is like-kind. Property located outside the United States is not like-kind to property located in the United States.
Like-kind rules for personal property differ from real property exchanges in that provisions for qualifying as like-kind are somewhat stricter and generally indicate that both the relinquished and replacement properties fit within the same “General Asset Class” or within the same “product Class”. Some examples of qualifying personal property:
- Office Furniture, Fixtures and Equipment
- Information Systems (computers and peripheral equipment)
- Livestock of the same sex
- Corporate aircraft for corporate jet
- Restaurant equipment for restaurant equipment
Product Classes include properties consisting of depreciable personal property that is listed in a 4-digit Product Class within Division D of the Standard Industrial Classification Code. This section contains a listing of manufacturer products and equipment and the classes are “broad” when referring to “farm”, “office” or other types of equipment. Vehicles must be replaced with similar types of vehicles.
For a successful personal property exchange, the services of a tax professional are suggested in order to comply with the replacement property rules.
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