Dealing with Incidental Personal Property in a 1031 Exchange

In a 1031 exchange, you have to buy like-kind real estate. Let’s say you sold an apartment building and you bought a bigger apartment building. That would be fine in a 1031 exchange because you’re exchanging like-kind real estate for other like-kind real estate.

But what if some of your 1031 exchange funds are being used to pay for incidental personal property that goes along with the apartment building? Perhaps there are window air conditioners, tools, or lawnmowers. These items aren’t real estate but may be thrown in with the deal and would customarily be sold with the building.

Identification Rules

You must identify your 1031 replacement property. If you’re receiving some incidental items as a part of the purchase, do you have to identify those items? As long as those incidental items don’t amount to more than 15% of the real estate you’re identifying, then you don’t have to worry about it from an identification point of view. Notice that we’re talking about 15% of the real estate, not 15% of the total deal. So you have to be careful. This is a trap for the unwary.

Pro Tip

If you’re getting used air conditioners, appliances, or other equipment, the IRS will generally respect a written allocation of value between the parties. It might be a good idea to formally allocate that all of these incidental personal property items are going to be sold to you at garage sale prices out of pocket – just out of an abundance of caution.

Questions About 1031 Exchanges?

Do you have questions about the 1031 exchange process? If so, you’ve come to the right place! CPEC1031, LLC provides 1031 exchange services for US taxpayers looking to defer capital gains taxes on the sale of qualifying real estate. We focus solely on like-kind exchanges and have over two decades of experience working in the 1031 exchange industry. Let us put our knowledge and expertise to work for you and help ensure your 1031 exchange is successful. Contact us today to learn more and schedule a time to discuss.

  •  Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

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