Can You do a 1031 Exchange Involving Notes?

 1031 Exchange of Notes

In Minnesota (or any other state, for that matter) can a person sell a single family rental property and do a 1031 exchange to purchase performing notes in other states?

Notes are Excluded from 1031

Notes are specifically excluded from 1031 exchange, so you cannot exchange out of a rental property and into performing notes (regardless of where the transaction takes place).

Here is some additional information from the tax code (26 U.S. Code § 1031): 

(1) In general, no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.
(2) Exception. This subsection shall not apply to any exchange of—
(A) stock in trade or other property held primarily for sale,
(B) stocks, bonds, or notes,
(C) other securities or evidences of indebtedness or interest,
(D) interests in a partnership,
(E) certificates of trust or beneficial interests, or
(F) choses in action.

For purposes of this section, an interest in a partnership which has in effect a valid election under section 761(a) to be excluded from the application of all of subchapter K shall be treated as an interest in each of the assets of such partnership and not as an interest in a partnership.

  • 1031 Hotline: If you have questions about what qualifies for a 1031 exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

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