Recently, a client came to us with the following situation:
I have a farm for sale - bare land, no buildings - that I would like to do a 1031 Exchange on if/when it ever sells. Can I exchange into ANY other type of Real Estate?
Tax Code Changes
Per recent tax code changes, US real property may be exchanged for other US real property. No personal property (non-real property) may be exchanged as a result tax reform.
Both the Relinquished Property and the Replacement Property must be held for a qualified purpose (either for productive use in a trade or business or for investment).
Section 1031 States:
No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like kind which is to be held either for productive use in a trade or business or for investment.
IRS PUB 544 States:
There must be an exchange of like-kind property. Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. The exchange of real estate for real estate and the exchange of personal property for similar personal property are exchanges of like-kind property. For example, the trade of land improved with an apartment house for land improved with a store building, or a panel truck for a pickup truck, is a like-kind exchange.
IRS PUB 544 also States:
Real property. An exchange of city property for farm property, or improved property for unimproved property, is a like-kind exchange.
Indirect ownership of real property through an entity such as an ETF or REIT may not qualify, so talk to your CPA about this question. You should consult with your accountant about this because the rules are complex and may depend on how the transaction is set up. Also, a DST or Delaware Statutory Trust may be an option to consider as an alternative.
Minnesota 1031 Exchanges
At Commercial Partners Exchange Company, our qualified intermediaries are proficient in all the complexities of section 1031. We can guide you through the process and ensure that your property meets all the necessary requirements for 1031 tax deferral. Give us a call today to talk about the details of your exchange with one of our qualified intermediaries. Our primary office is located in downtown Minneapolis, but we work with clients throughout the state of Minnesota, and across the United States.
- Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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