In order to qualify for a 1031 exchange, the property that you're selling has to have been held for investment or business purposes. Sometimes people have been holding raw land, which may not actually generate any cash flow while holding the property.
If you buy raw land hoping that it will go up in value, your holding costs may be property taxes, insurance, and other expenses related to the property while you're not receiving any rental income.
Many people ask if they can exchange into cash flowing property out of property that they've held for investment purposes but which has not generated any cash flow.
As long as your mental intent was to acquire and hold the old relinquished property for investment or business purposes, even if it didn't generate cash flow, you can still do a 1031 exchange into other like-kind property that will also be held for investment or business purposes.
As a bonus, it's okay if your replacement property generates cash flow. In fact it’s probably a good thing because it would substantiate that you're using the replacement property for investment or business purposes.
The reason that Congress created 1031 in the first place was to allow investors to move their capital to the most advantageous investment and to stimulate the economy by allowing investors to seize upon opportunities that both benefit them and the economy by redeploying their cash where the economy needs it.
- 1031 Hotline: If you have questions about 1031 exchanges of non-income producing property, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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