| |
|
|
What Property Qualifies for §1031 Treatment?
To qualify for a tax deferred exchange under §1031, both the relinquished and the replacement properties must be held by the Exchanger for investment purposes or for “productive use in the trade or business”. The Exchanger’s purpose and intent in holding the property, rather than the type of property, is the critical issue. The use of the property by the other parties to the exchange (buyer and/or seller) is irrelevant. The following are examples of qualifying properties:
- Bare land
- Commercial rental
- Industrial property
- 30-year leasehold interest
|
- Farmer’s farm
- Residential rental
- Doctor’s own office
- Percentage interest in investment property
|
Properties that do not qualify for exchange purposes:
- Personal residences
- Stock in trade or other property held primarily for sale (Note: this includes property held by a developer or other dealers in property);
- Securities or other evidences of indebtedness or interest;
- Stocks, bonds, or notes;
- Certificates of trust or beneficial interests;
- Interests in a partnership (Note: the partnership can elect out of partnership status under §761(a))
Does My Vacation Home Qualify for §1031 Treatment?
It is important to note that the intent by the Exchanger to hold the property for personal use will prevent the property from qualifying for exchange treatment. Therefore, second homes will not qualify for exchange treatment unless the taxpayer changes how they treat or use the second home. For example, a taxpayer could “convert” their second home to a valid exchange property and establish this intent by properly renting the property and holding it as a legitimate rental property. However, the taxpayer cannot just simply rent his or her second residence and expect it to automatically qualify for exchange treatment. Many people own vacation homes, which are rented out during the time when the taxpayer is not using the home. As long as they make the home available for rental for 50 weeks per year, then the residence should be eligible for tax deferred treatment upon sale.
Does My home that I run my business out of qualify for §1031 treatment?
In this case when the taxpayer sells the personal residence, the transaction must be split such that the portion used for business purposes is treated separately for tax purposes from the portion used for a personal residence. The taxpayer could then qualify the entire transfer for tax-free treatment; the business portion could qualify for a tax deferred exchange and the personal residence portion could qualify for a tax-free sale under §121 provided the transaction otherwise met the exemption requirements of §121. Naturally, consultation with a tax advisor is important whenever a taxpayer changes how they intend to hold property.
Exchanging with a Related Party
Exchanges between related parties are allowed, but the Exchanger must follow specific rules before the exchange will qualify for tax deferral. Related parties are defined by the IRS as any person or entity bearing a relationship to the Exchanger, such as member of a family (brothers, sisters, spouse ancestors, and lineal descendants); and corporations and partnerships with more than 50% direct or indirect ownership of the stock, capital or profits in these entities. Under IRC §1031(f) it is clear that two related parties, owning separate properties, may “swap” those properties with one another and defer the recognition of gain as long as both parties hold onto their replacement properties for two year following the exchange.
Contact Us
Securities offered through Pacific West Securities, Inc. Member FINRA/SIPC. Advisory services offered Pacific West Financial Consultants, Inc. A Registered Investment Advisor. AMBAR Financial Group is independent of Pacific West Securities, Inc.
|
|
 |
Office
Memphis, Tennessee |
| |
 |
Student Housing
Tallahassee, Florida |
|
|
