Choosing an appropriate replacement property is one of the keystones of a successful 1031 exchange. The IRS provides leeway for what qualifies as “like-kind” replacement property. However, there are some limitations to be aware of.

When determining whether a 1031 exchange is suitable for you, it’s important to understand which types of properties qualify under IRS regulations. Here’s a look at some of the most common property types that do not qualify for a 1031 exchange.

Properties Not Held for Investment or Productive Use

The IRS states that both the relinquished and replacement properties must be held for “investment purposes” or “productive use in a business or trade.” This means that you must lease or rent the space, hold the property to grow its value as an investment, or use it to house one or more businesses. Under this definition, your primary residence, vacation property, or second home would not qualify for a 1031 exchange.

Properties Held for Sale or Resale

When determining whether a property qualifies, the IRS evaluates a property owner’s “intent.” Any properties deemed to be held primarily for sale or resale are excluded. As a result, if you’ve purchased a property with the intention of “flipping” it, you likely will find that you’re not able to enjoy the tax deferral benefits of a 1031 exchange.

Properties in U.S. Territories or Foreign Countries

While the states where the properties are located don’t matter, national borders do. To qualify for a 1031 exchange, the relinquished and replacement properties must be located within the United States. Foreign 1031 exchanges are permitted if the relinquished and replacement properties are located outside the U.S.

Properties located in the U.S. Virgin Islands, Guam, or Northern Mariana Islands may count as like-kind to U.S. properties. However, properties located in any other U.S. territories, including Puerto Rico, are not considered like-kind to domestic U.S. properties.

Personal Property

Before the Tax Cuts & Jobs Act of 2017, personal property like artwork, livestock, and farm equipment were eligible for a 1031 exchange. Today, only real investment property including certain fractional real estate ownership structures will qualify.

Stocks and Bonds

Stocks, bonds, notes, and other securities are not considered like-kind property. Nor are partnership interests and certificates of trusts.

Learn More About Like-Kind Property Exchanges  

If you’re considering a 1031 exchange, consulting with a qualified professional can help you avoid costly mistakes. The team at Fortitude Investment Group is here to help. Please feel free to contact us at any time. 

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Because investor situations and objectives vary this information is not intended to indicate suitability for any individual investor.  

DST 1031 properties are only available to accredited investors (typically defined as having a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last two years; or have an active Series 7, Series 82, or Series 65.  Individuals holding a Series 66 do not fall under this definition) and accredited entities only.  If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney.

This is for informational purposes only and is not an offer to buy/sell an investment. There are risks associated with investing in Delaware Statutory Trust (DST) and real estate investment properties including, but not limited to, loss of entire principal, declining market value, tenant vacancies and illiquidity. Diversification does not guarantee profits or guarantee protection against losses. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. Because investors situations and objectives vary this information is not intended to indicate suitability for any particular investor. This information is not meant to be interpreted as tax or legal advice. Please speak with your legal and tax advisors for guidance regarding your particular situation.

Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. Insurance products offered through Concorde Insurance Agency, Inc. (CIA) Fortitude Investment Group is independent of CIS, CAM, and CIA.

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