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