What are 1031 Exchange Property?
What qualifies as 1031 Exchange Property?
1031 Exchange of property saves you a lot of tax . Use this calculator to find out tax savings due to 1031 exchange . But this tax benefit accrues to a tax payer only if the properties qualify for 1031 exchange treatment. So, before you think to defer gains on a property ,one must understand clearly the type of property or assets that qualify as qualified use property for 1031 exchange purposes. For a successful deferment plan under section 1031 of IRC,, it must be examined if all the conditions are satisfied by the said properties .
What is the Nature of Property ?
The most important qualification for the property is that it must be held for investment or used in your trade or business. What is held for investment or use in a business is debatable issue , so only facts of the case can actually state whether the property in question falls under the category. But , if your property , without any doubt falls either in category of investment property or a property used in your business or trade. it is certainly a Qualified
What was your intent to hold property?
The amount of time for which you hold the property is not the key issue , but your intent to hold your properties for investment purposes is . IRS may actually examine if you truly had the intent to hold your relinquished properties and your like-kind replacement properties for investment or trade or business .
How do you do that ? A simple way to prove your intent is the holding period i.e you hold the properties sufficiently long enough to prove your intent to hold it for investment. Please also note that whether a property is producing income or not is not important. You just need to prove that it was investment property. If the you acquired a property or asset for use in your trade or business,it will qualify for tax-deferred exchange treatment.
For example , following is a list of properties that you may acquire to use in your trade or business . These are also qualify for 1031 exchange.
- a piece of machinery or manufacturing equipment
- a commercial office building (real estate) to operate your business from, or
What Property Does Not Qualify for 1031 Exchange?
Following types of properties or assets clearly not qualified for the 1031 Exchange .
- The Internal Revenue Code specifically excludes some properties like stocks, bonds, notes, securities and interests in partnerships even if they are used in trade or business or for investment.
- Properties or assets acquired and held for sale . So, is the case , if you acquire a property and then selling it after repairing or renovation .Another example of such non-qualified property is the purchase of a multi-family property , that divided into condos and then selling individually .
- Personal property can not be exchanged for real property. Many State’s law generally governs the determination as to whether property is classified as real or personal property. However , if personal property satisfies all the conditions of a qualified property or liked-kind property , it may qualify for 1031 Exchange.Therefore , a primary residence usually does not qualify for an 1031 exchange, however a portion of the primary residence that is used in a trade or business or for investment may qualify for a 1031 Exchange.
- Foreign property does not qualify for exchange with a domestic property. Thus, property sold in one state may be exchanged for property located in another state,but not if they are located outside United States of America.
So if you want to defer gains by 1031 exchange of properties , check that the property or asset qualifies for it.