What is qualified like kind property in a 1031 Exchange? | IPX1031 (2024)

FAQs

What is qualified like kind property in a 1031 Exchange? | IPX1031? ›

Properties are of like-kind if they're of the same nature or character, even if they differ in grade or quality. Real properties generally are of like-kind, regardless of whether they're improved or unimproved. For example, an apartment building would generally be like-kind to another apartment building.

Generally, any real estate property held for productive use in the trade or business or for investment qualifies for a like-kind exchange. A taxpayer that sells a piece of investment property and buys another within a stipulated time limit will not have to pay tax on the first disposal.

Property used primarily for personal use, like a primary residence or a second home or vacation home, does not qualify for like-kind exchange treatment. Both properties must be similar enough to qualify as "like-kind." Like-kind property is property of the same nature, character or class.

As mentioned, a 1031 exchange is reserved for property held for productive use in a trade or business or for investment. This means that any real property held for investment purposes can qualify for 1031 treatment, such as an apartment building, a vacant lot, a commercial building, or even a single-family residence.

In the simplest situation, where only like-kind property is exchanged and the taxpayer does not recognize any gain or loss, the basis in the surrendered property carries over to the acquired property.

A Primary or Secondary Residence: An Exchanger's primary or secondary residence is not considered like kind and does not qualify for a 1031 exchange. It should be noted that primary residences do qualify for the tax exclusion, with certain restrictions, but under IRC Section 121 – not Section 1031.

Examples of property that does not qualify for tax-deferral treatment under Section 1031: Personal use properties. Property held for sale, such as spec homes, building lots and “flips” Partnership interests. Stocks, including that of a Real Estate Investment Trust (REIT), and bonds.

If a replacement property is of lesser value than the property sold, the difference (cash boot) is taxable. If personal property or non-like-kind property is used to complete the transaction, it is also boot, but it does not disqualify for a 1031 exchange.

Personal property is basically anything that can't be considered real property. Personal property is a property that can be moved from one place to another. It is not attached to or associated with a particular piece of land.

For nontaxable exchanges, taxpayers maintain a continuing investment in comparable property. 12-2 Why might a taxpayer want to avoid having an exchange qualify as a like-kind Exchange? A taxpayer may want to recognize a loss on the exchange.

What must the two properties do to qualify for a 1031 tax deferred exchange? ›

The main requirements for a 1031 exchange are: (1) must purchase another “like-kind” investment property; (2) replacement property must be of equal or greater value; (3) must invest all of the proceeds from the sale (cannot receive any “boot”); (4) must be the same title holder and taxpayer; (5) must identify new ...

To have a valid 1031 exchange, a qualified intermediary (“QI”) must be assigned the seller's rights to proceeds under the contract and transfer the relinquished property on behalf of the seller, pursuant to an exchange agreement. See Treas. Reg. §1.1031(k)-1(g)(4)(iii)-(vi).

IPX1031: Best Overall 1031 Exchange Company. IPX1031 is the largest 1031 Exchange company in the US. The company acts as a full-service Qualified Intermediary in all types of tax deferred 1031 Exchange transactions in all 50 US states. IPX1031 was founded in 1988, with headquarters in Chicago, IL.

Properties are of like-kind if they're of the same nature or character, even if they differ in grade or quality. Real properties generally are of like-kind, regardless of whether they're improved or unimproved. For example, an apartment building would generally be like-kind to another apartment building.

As any tax professional or qualified professional will tell you, the 'worth' of this property is vital to your tax bill. You don't want to make a mistake on those tax form fields! Overall, the basis of the property consists of its purchase price, the costs of any capital improvement, and any taxable impact.

Calculating Cost Basis

1031 exchanges allow you to defer capital gains. In deferring those gains, your basis has to be recalculated. The general basis concept is that the new property purchased is the cost of that property minus any gain you deferred in the exchange.

The IRS considers all “Investment Properties” to be “Like-Kind.” Properties do not need to be the same type. For example, raw land can be exchanged for an office building, a warehouse can be exchanged for NNN retail property, or a rental house for a Replacement Property Interest in a 300-unit apartment complex.

Example 1: The Basics

You choose to sell your current property with a $150,000 mortgage on it. It sells for $650,000. If you want to meet the conditions for a 1031 exchange, you much purchase a replacement property for at least $650,000. In addition, you need to borrow a minimum of $150,000 to pay for it.

What is a 1031 Exchange? An IRS Rule (IRC Section 1031) that allows sellers to sell property tax free.