If you are considering selling a piece of investment property and investing in another, you may wonder if the properties meet the eligibility requirements for a 1031 exchange. In order for this transaction to be eligible for 1031 exchange, the properties must be classified as “Like-Kind” properties. In the realm of real estate, the definition of “like-kind” is fairly broad in scope. Most investment real estate is considered like-kind to most other investment real estate. If you are selling some farmland and intend to purchase more farmland, you would be eligible to defer capital gains by pursuing a 1031 exchange since these are like-kind properties.
However, it’s important to realize that properties don’t need to be exactly the same in order for you to qualify for an 1031 exchange. After all, no two properties are exactly the same. This means that you could sell that same farmland and invest in a number of different properties besides farmland and still be eligible for a 1031 exchange. Below, we take a closer look at which properties qualify for a 1031 exchange and which ones would not.
Like-Kind Properties Explained
As we noted above, when performing a 1031 exchange, you must be buying and selling like-kind investment properties. In general, a real estate asset is considered “like-kind” to any other real estate asset so long as both are held for:
Business or productive use in a trade
Investment purposes
So in the farmland example, that farmland would be like-kind to a number of other assets, like an apartment or condominium rental. As long as they meet that threshold, the properties should be considered like-kind to one another.
There is a broad definition of what is eligible for a 1031 exchange, but not every single property is eligible. Some properties that would generally not be eligible for a 1031 exchange include:
A primary residence
Property that was held for resale (like a home you flipped)
Personal property
Foreign real estate
Of course, there can be some exceptions to these situations. Because of this, it is imperative that you work with a firm that understands the ins and outs of these exchanges. For more information, or to learn more about how we can help you with your asset exchange, reach out to CPEC1031 today at (612) 643-1031.
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
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