The Meaning Of A 1031 Like Exchange
Section 1031 of the Internal Revenue Code, like many laws and codes, offers its own exclusive terms that mean nothing to the uninitiated. “1031 like exchange” or “like-kind exchange” are two terms used to describe a property that is eligible for capital gains tax deferment under the Section 1031 requirements. Like-kind properties can be exchanged because they are the same type of property, or are used for the same type of business. These properties are used for investment or purposes or for commercial endeavors, and cannot be personal use properties, such as a private home in which the investor resides or a vacation home, which cannot be classified as a 1031 like exchange property even if it is only used a few weeks out of the year. Properties do not need to be of the same quality to be classified as like-kind, and they do not even need to be improved or updated. The only requirement for this attainment of this classification is that they be used toward the same ends, either investment or commercial endeavors.
It is very important that the property the investor is considering for the 1031 like exchange, whether it is to give or to receive be classified as like-kind. Otherwise, without this all-important classification, tax deferment benefits would be declined under the stipulations of Section 1031, and the 1031 like exchange would not be possible. All real property may be classified as like-kind, as well as other types of property in the United States. Exceptions to the 1031 like exchange rule are farm animals of different sexes, bonds, stocks and securities. None of these may be classified as like-kind or used in Section 1031 capital gains exclusion trades.
All real property may be classified as like-kind and traded for other such like-kind property using the Section 1031 directions for a 1031 like exchange. A rental unit may be traded for another rental unit or for a commercial building, a strip mall for a restaurant, a single-family home being rented out for a parcel of undeveloped acreage and many other examples. Possibilities for exchanges are endless as long as the real estate fulfills the requirement for classification. Land, that is to say, undeveloped acreage may be exchanged under this rating as well, for more land, or a building or any real estate that is held for investment or has potential commercial usage. Some personal property in some isolated cases may be classified as like-kind, but this is rare and the question should be consulted with a qualified real estate attorney with knowledge of the many facets of Section 1031 before the 1031 like exchange is attempted. With the advice of a good real estate attorney, an investor can make some profitable investments aided by the tax deferment offered by Section 1031. As the popularity of investment in real estate continues to raise, the popularity of taking advantages of the deferments offered by Section 1031 will rise as well. And as more and clearer information is made available, more investors are willing to join in the capital gains tax savings offered by the 1031 like exchange maneuver.
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