Is There a Difference Between Income vs. Investment Property in a 1031 Exchange?

 Income vs. Investment Property

Is there a difference between income and investment property? Do both fall within the 1031 exchange guidelines? That's our topic for today's article.

What is the Held for Requirement in a 1031 Exchange?

Section 1031 provides that 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 the property is exchanged solely for property of a like kind that is to be held either for productive use in a trade or business or for investment. 

Whether the property exchanged is held for productive use in a trade or business or for investment is a question of fact. The manner in which the relinquished property is held at the time of the exchange controls, not the manner in which it was held when acquired - see Wagensen v. Commissioner, 74 T.C. 653 (1980).

Neither the Internal Revenue Code nor the Income Tax Regulations under § 1031 provide further guidance concerning the phrase “held for productive use in a trade or business or for investment” (the “held for” requirement).   

Rev. Proc. 2008-16

The Internal Revenue Service (the “Service”) deals with this issue in Rev. Proc. 2008-16, 2008-10 I.R.B. 547 in the context of properties in a rental pool that may be used sparingly for personal use.

Rev. Proc. 2008-16 provides circumstances under which the IRS will not challenge whether a dwelling unit qualifies as property that meets the “held for” requirement even though the property is occasionally used for personal purposes. If the safe harbor provisions of the Rev. Proc. are met, the entire property meets the “held for” requirement for purposes of § 1031. The Rev. Proc. provides the following:

The Service recognizes that many taxpayers hold dwelling units primarily for the production of current rental income, but also use the properties occasionally for personal purposes. In the interest of sound tax administration, this revenue procedure provides taxpayers with a safe harbor under which a dwelling unit will qualify as property held for productive use in a trade or business or for investment under § 1031 even though a taxpayer occasionally uses the dwelling unit for personal purposes. 

  • 1031 Hotline: If you have questions about 1031 held for requirements, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved