1031 Exchange FAQ - TYPES

Quick 1031 FAQ Search




1031 Question Categories

Common 1031 Exchange Questions

In a 1031 Exchange, what are the tax effects of receiving boot?

What is 1031 Exchange Real Estate?

1031 Exchange Who? What? When? Where? Why? How?

Ok, so I did a 1031 exchange this year. Now what do I do?

I sold a property last month, is it too late to 1031 Exchange it now?

What property does not qualify for 1031 Exchange?

Often, when discussing 1031 Exchange Qualified Properties, it is better to discuss properties that DO NOT qualify for 1031 Exchange treatment.
This is important because if you transfer property that does not qualify for 1031 Exchange it will be treated as a regular sale of the property and subject to capital gains.

The following types of property are excluded from nontaxable 1031 Exchange treatment or you cannot 1031 Exchange the following:


Property held for personal use such as your primary residence.
Dealer property or stock in trade and property held primarily for sale such as inventories and real estate held by dealers.
Stocks, bonds, notes, or other securities or evidences of indebtedness such as accounts receivable.
Partnership interests.
Notes
Choses in action.
Certificates of trust or beneficial interest


Related Info: qualify, sale, notes, treatment, following, properties


Can I take a note on the sale of my Relinquished Property and still qualify for a 1031 exchange?

Yes! Realty Exchangers, Inc., regularly manages these types of transactions and knows the correct procedure that must be followed to assure §1031 Exchange treatment. The installment note and related documents are made out in the name of the QI (Qualified Intermediary). There are four choices on how to use it to buy replacement property:

You can use it to acquire Replacement Property by trading it to the "Seller " for part of the consideration for purchase of new property. This does not trigger the unrecognized gain in the installment note.
You can instruct the QI to sell the note on the open market (you can negotiate this sale or have the QI do it as your agent) and add the amount realized to the exchange proceeds. This will give you all cash to negotiate your replacement purchase. It's less desirable because of the discount you might have to give on the sale of the note. This does not trigger the unrecognized gain in the installment note.
A party related to you, the exchanger, such as a closely held corporation or relative can either purchase the installment note from your QI or provide financing so that your QI receives all cash at closing. You should consult with your tax advisor regarding structuring this type of transaction. This does not trigger the unrecognized gain in the installment note.
You can wait until the end of the exchange and receive the installment note back from the QI. This will result in the note becoming "boot" and it will be taxable. However, at this point the installment sale rules under §453 kick in and you are permitted by election to use the installment method of tax accounting and only recognize capital gain as you collect principal payments each year. Interest on the installment note is always taxable at ordinary income rates. Your installment sale percentage for figuring gain will be 100%.

Related Info: qualify, relinquished, sale, installment, gain, purchase, unrecognized, replacement


Should I use 1031 Exchange to "flip" a property

Never. There are some 1031 Exchange "expert" bloggers out there who claim that there is precedence that shows people have purchased property with an intent for investment but turned around and "flipped" the property instead for profit. As a 20 year Qualified Intermediary, we have seen these types of schemes come and go.

It is commonly known that any property held "primarily for sale" or dealer property is not qualified for 1031 Exchange. Any attempts to create "wiggle" room on this statue is not serving your clients. What if you fail? Too much to risk, here.

While some may get away with it, we feel that claiming that it is possible to "flip" a 1031 property is confusing to most people. 1031 Exchanges are meant to be simple, easy and clear.

Related Info: flip, people, statue, serving, room, wiggle, attempts


It's my understanding that a 1031 exchange must be "In-Kind". Is that true?

The term is "like-kind" and in for there to be a 1031 Exchange, the IRS is looking for a transaction where both relinquished property and the replacement property are be held for use in a trade or business and/or held for investment. Also, these properties must be held in the United States or US Virgin Islands. There are several examples of these types of properties but the easiest way to determine qualification is to ask yourself, "Is this a personal property or am I holding this property with the intention of quick resale?"

Related Info: in-kind, properties, easiest, determine, types, several, examples


I heard I can 1031 Exchange personal property. What is that?

The property used in business can be used in a 1031 Exchange. But they must be of the same class. The nonrecognition rules of 1031 Exchange do not apply to an exchange of one kind or class of personal property for personal property of a different kind or class. However, there’s an important exception to the personal property rules related to deferred exchanges of real estate. It’s explained in Chapter Five. The exception defines incidental personal property transferred with real property in a §1031 exchange.

Depreciable tangible personal property may be either “like-kind” or “like class” to qualify for nonrecognition treatment. Personal property of a like class is considered to be of a “like-kind.” Like-class properties are depreciable tangible personal properties within the same General Asset Class or Product Class.

General Asset Classes describe the types of property frequently used in many businesses. They include:

Office furniture, fixtures, and equipment,
Information systems (computers and peripheral equipment),
Data handling equipment (except computers),
Airplanes (airframes and engines), planes used in commercial or contract carrying of passengers or freight, and all helicopters (airframes and engines),
Automobiles, and taxis,
Buses,
Light general purpose trucks,
Heavy general purpose trucks,
Railroad cars and locomotives (except those owned by railroad transportation companies),
Tractor units for use over the road,
Trailers and trailer-mounted containers,
Vessels, barges, tugs, and similar water-transportation equipment (except those used in marine construction), and
Industrial steam and electric generation or distribution systems.

Product classes include property listed in a 4-digit product class (except any ending in “9”, a miscellaneous category) in Division D of the Standard Industrial Classification codes of the Executive Office of the President, Office of Management and Budget, Standard Industrial Classification Manual (1987) (SIC Manual).

Copies of the SIC Manual may be obtained from the National Technical Information Service, an agency of the U.S. Department of Commerce.

Here are two examples taken from Reg 1.1031(a)-2 Additional Rules for Exchange of Personal Property [xx] :

You transfer a personal computer used in your business for a printer to be used in your business. The properties exchanged are within the same General Asset Class and are therefore of like class.
Henry transfers a grader to Ron in exchange for a scraper. Both are used in a business. Neither property is within any of the General Asset Classes. Both properties, however, are within the same Product Class and are therefore of like-kind.

Related Info: personal, class, general, product, equipment, business


Is the 1031 Exchange property I'm buying impacted by the depreciation of the property I'm selling?

Depreciation taken or method used on the relinquished property does not carry over to the replacement property in a 1031 Exchange. You figure the substituted basis of the replacement property, allocate the basis between land and depreciable assets and start over following current depreciation rules for the types of depreciable assets you acquire. Your CPA can explain this to you more fully.

Related Info: selling, depreciation, impacted, buying, basis, replacement, assets, depreciable, over


Are 1031 Exchange property I'm buying impacted by the depreciation of the property I'm selling?

Depreciation taken or method used on the relinquished property does not carry over to the replacement property in a 1031 Exchange. You figure the substituted basis of the replacement property, allocate the basis between land and depreciable assets and start over following current depreciation rules for the types of depreciable assets you acquire. These types of que

Related Info: selling, depreciation, impacted, buying, basis, depreciable, assets, replacement, types


Are you sure in a 1031 Exchange that land zoned for Farming can be traded for land zoned Residential?

Under the 4 classifications of Real Estate, Real Estate held for Investment purposes such as land qualifies for IRS 1031 Exchange like-kind property. There is no mention of how the land is zoned because zoning is a city, county or state issue, and rarely is it a federal issue. So we are certain that these two types of land are considered like-kind and subject to 1031 Exchange Tax Relief. There can be some issues if either parcel of land has a residence that is being used as a primary residence. There we are getting into mixed classification issues. More on Mixed Classifications as they relate to 1031 Exchange, can be found by clicking here.

Related Info: land, zoned, residential, farming, traded, classifications, issues, residence, mixed, like-kind


Can I 1031 exchange property held for personal use for property held for productive use? Why not?

In a 1031 Exchange, property held for personal use can not be exchange for property held of productive use because personal use property is not considered like-kind with productive use property. In a property exchange, you must exchange like for like. Here is an excerpt from our 1031 Exchange Knowledge base:

The nonrecognition rules of §1031 do not apply to an exchange of one kind or class of personal property for personal property of a different kind or class. However, there’s an important exception to the personal property rules related to deferred exchanges of real estate. It’s explained in Chapter Five. The exception defines incidental personal property transferred with real property in a §1031 exchange.

Depreciable tangible personal property may be either “like-kind” or “like class” to qualify for nonrecognition treatment. Personal property of a like class is considered to be of a “like-kind.” Like-class properties are depreciable tangible personal properties within the same General Asset Class or Product Class.

General Asset Classes describe the types of property frequently used in many businesses. They include:

Office furniture, fixtures, and equipment,
Information systems (computers and peripheral equipment),
Data handling equipment (except computers),
Airplanes (airframes and engines), planes used in commercial or contract carrying of passengers or freight, and all helicopters (airframes and engines),
Automobiles, and taxis, Buses,
Light general purpose trucks,
Heavy general purpose trucks,
Railroad cars and locomotives (except those owned by railroad transportation companies),
Tractor units for use over the road,
Trailers and trailer-mounted containers,
Vessels, barges, tugs, and similar water-transportation equipment (except those used in marine construction), and
Industrial steam and electric generation or distribution systems.

Product classes include property listed in a 4-digit product class (except any ending in “9”, a miscellaneous category) in Division D of the Standard Industrial Classification codes of the Executive Office of the President, Office of Management and Budget, Standard Industrial Classification Manual (1987) (SIC Manual).

Copies of the SIC Manual may be obtained from the National Technical Information Service, an agency of the U.S. Department of Commerce.

Here are two examples taken from Reg 1.1031(a)-2 Additional Rules for Exchange of Personal Property [xx] :

You transfer a personal computer used in your business for a printer to be used in your business. The properties exchanged are within the same General Asset Class and are therefore of like class.

Henry transfers a grader to Ron in exchange for a scraper. Both are used in a business. Neither property is within any of the General Asset Classes. Both properties, however, are within the same Product Class and are therefore of like-kind."

Related Info: productive, personal, class, general, asset, product, properties


What are the restrictions of using a 1031 Exchange?

First of all the property you are trying to sell and convert into a 1031 Exchange must qualify as like-kind under the IRS's 4 classifications of Real Estate. Of the 4, there are 2 classifications of real estate that qualify for IRS 1031 Exchange. These are:

Property that is held for Investment: This is almost always some form of land. Zoning of the land does not matter. You can sell Farm Land for a land lot in a city, Land is land and is almost always considered like-kind.

Property held for a Business or Trade: This type of real estate is property that is earning an income as a business, such as an apartment or business complex or a rental home. Sometimes vacation homes can qualify IF they are rented out for a significant portion of the year and are never considered as you primary residence.

Both of these types of real estate are inter-changeable, meaning both are considered as like-kind. This means you can 1031 Exchange a piece of land for a rental home. You can 1031 Exchange an apartment complex for a parcel of land. Land that has a primary residence or an apartment complex that has a primary residence as considered Mixed Classifications and have a different set rules.

Related Info: restrictions, land, estate, real, primary, qualify, complex


In a 1031 Exchange, what is the difference between land held for sale and land held for investment?

When you purchase land, it is difficult to prove that you purchased it with the intent to sell it, as the nature of a land purchase is to hold it for investment because most all land will continue to go up in value. In a 1031 Exchange, the two types of Real Estate that qualify for tax deferment is Real Estate held for investment or Real Estate held for a business or trade, as these types of property are considered like-kind, according to the IRS. Perhaps you have heard of the term, property held for sale. Don't confuse this term for land. Typically, property held for sale (or dealer property), refers to property purchased with the intent to "flip" for a quick buck. The IRS has taken steps to prevent these type of property from 1031 Exchange and they shouldn't be confused with land.

Related Info: land, investment, sale, difference, estate, real, types, purchase


What does "like property" mean in a 1031 exchange?

For some of the readers, this may seem a very simple question, of which many already know the answer. However, as more and more taxpayers seek information about 1031 Exchange, this question continues to be asked. So what "like property"? The term "like property" refers to "like-kind" property which is term used by the IRS to describe the types of real estate that can receive capital gains tax deferment using section 1031 Exchange. IRS classifies real estate into 4 classifications, of which only 2 may be used for 1031 Exchange. These are "real estate held for investment" (land) and "real estate held as a business or trade" (a rental home). Many taxpayers are surprised to hear the land and be traded as like-kind with an apartment building under these definitions. It is true and taxpayers have been taking advantage of this for 20 years!

Related Info: , real, estate, taxpayers, land, like-kind, term


How do I figure out depreciation recapture on my personal residence for a 1031 Exchange?

This is a tricky question because you ask about depreciation recapture but you want to know how it reflects your 1031 Exchange on your personal residence. We have a great article about depreciation recapture about it in our 1031 Exchange Knowledge Base and we also show you how to calculate this in our FREE Capital Gains Tax Estimator. But we need to visit the other portion of this question about how depreciation recapture effects a 1031 exchange with your personal property. The most important aspect of this answer is that NO - you CANNOT 1031 Exchange your personal residence because your home is NOT considered like-kind property and will not qualify for tax deferred exchange. Do not attempt this, your exchange will fail and you will be subject to the capital gains tax on your home. For information about the types of property that do qualify for 1031 Exchange treatment, visit http://www.realtyexchangers.com/1031_Exchange_Information_Center/Topic_2_-_Qualified_Property.php#The Four Classifications of Real Estate.

Related Info: residence, personal, recapture, depreciation, figure, home, gains, qualify






X 1031