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“Like-kind” property
does not mean “same type” property.
“Like-kind” is one of the advantages
of Section 1031 exchanges, because the definition
is so broad. All real property is “like-kind”
with all other real property. Any real estate
held for investment or business can be exchanged
for any other real estate to be used for investment
or business. For example, you may exchange a rental
house for a shopping center or unimproved land
for an apartment building. The following are examples
of “like-kind” property exchanges:
• Residential for commercial
• Bank building for swamp land
• Bare land for residential
• Fee simple interest for 30 year leasehold
• Single family rental for multi-family
rental
• Non-income producing for income producing
• Rental mountain cabin for a dental office
in which the exchanger intends to practice
You must hold your property for investment or
for productive use in your trade or business to
qualify for Section 1031 treatment. The critical
issue here is your purpose in holding the property—how
you intend to use the property—rather than
the type of property.
What you may not exchange is your residence or
second home, nor may you acquire as your replacement
property a house to be used as either. The intent
to hold the property for personal use will prevent
the property from qualifying for Section 1031
treatment unless you change how you treat or use
it. For example, you could “convert”
your second home to a valid exchange property
and establish this intent by properly renting
it and holding it as a legitimate rental property.
Consultation with a tax advisor is important if
you change how you intend to hold the property.
The intent to hold property “primarily for
sale” will prevent it from qualifying for
Section 1031 treatment. Most properties owned
by developers, builders and people who perform
rehabilitation work are held primarily for sale
and may not be the subject of an exchange. When
these properties are sold, they are subject to
ordinary income taxes rather than capital gain
taxes.
Partnership interests, notes secured by real property,
contract vendor’s interests and foreign
property do not qualify for Section 1031 treatment. |
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