In a 1031 Exchange, property must be exchanged for Like Kind property? This means that the property purchased must be Like Kind with the property sold. In real estate exchanges, all property is Like Kind with all kinds of property. As you can see, an office building is like kind with raw land, a farm is like kind with a motel. Even a 30-year lease is considered real property, and like kind with all other real property. Therefore, all real estate is like kind with all other real estate. For personal property, the Like Kind rules are much stricter. A twin-engine airplane must be exchanged for a twin-engine airplane, not a single engine jet. A computer can be exchanged for a printer, since they both fall within the same asset class, but a computer cannot be exchanged for a desk.

The Economics of a Condo Conversion. Why convert your apartment units into condominiums? Several economic reasons are making it more lucrative to convert units into condominiums, including: (1) the escalating sales prices of the past few years; (2) developers paying substantial premiums to acquire and transform both large and small rental properties into condos; (3) apartment owners finding their apartment units are worth much more if divided and sold as condos, rather than marketed as a single apartment complex; (4) rents falling behind the increasing sales prices for the apartment units in many parts of the U.S.; and (5) the existence of many more potential unit buyers than buyers of entire buildings. Some of the leading regional markets for conversions are those in resort areas and in growing retirement areas, as the baby-boom population continues to age and increase their leisure options.

You cannot purchase the replacement property with the intent to move into it as a personal residence. If, however, you hold the replacement property for a sufficient time to establish the requisite intent for a 1031 Exchange, then you may move into the property and thus change the nature of the use of the property. After moving into the property, a taxpayer may look to take the Section 121 exemption for personal residences. Under the recently enacted law, to gain the 121 exemption, the property must not have been the subject of a 1031 exchange in the previous 5 years (5 years from the purchase of the replacement property).

A TIC is a type of tenancy-in-common that is offered as a replacement property investment to 1031 exchangers. TIC's have Sponsors that purchase the property and apply for financing on the property. The properties are generally triple-net with A-rated tenants. TICS are sometimes sold as securities and sometimes as real estate. The SEC classifies TIC's as securities (if not both securities and real estate). As a security, they can only be sold by a securities broker-dealer, and investors are given special disclosures and protections. Some TIC companies rely on legal opinions that TIC's are real estate and not securities. Securities TIC's are sold only by the securities broker-dealers and not directly by the Sponsor. TIC's are generally considered as a possible replacement property by investors that have managed a property (the relinquished property), but are looking for less active management in their replacement property.

You cannot purchase the replacement property with the intent to move into it as a personal residence. If, however, you hold the replacement property for a sufficient time to establish the requisite intent for a 1031 Exchange, then you may move into the property and thus change the nature of the use of the property. After moving into the property, a taxpayer may look to take the Section 121 exemption for personal residences. Under the recently enacted law, to gain the 121 exemption, the property must not have been the subject of a 1031 exchange in the previous 5 years (5 years from the purchase of the replacement property).

As long as the taxpayer does not use the property substantially for personal use, a vacation home can qualify. In other words, the taxpayer can have minimal personal use and rent it out for the remainder of the year and still qualify for Section 1031 tax deferral purposes. A vacation home will not qualify if the taxpayer personally uses the vacation home the greater of 14 days or 10% of the days during the year that the unit is rented.

Real Estate that has been or will be held for income production (rental), investment or used in a trade or business will qualify for 1031 tax deferral. Generally, any type of real estate may be traded for another type of real estate. That means, Hotels, Rental Homes, Multi-Family Dwellings, Commercial Office Buildings, Farmland, Raw Acreage, Leases for more than 30 years may all be exchanged for another type of Real Estate.

IRS will disallow 1031 tax deferral and re-characterize it as a taxable sale resulting in capital gains taxes should a taxpayer (Exchanger) receive the proceeds of a sale. The Treasury Regulations allows a middle man (Qualified Intermediary) to act as an accommodator, receiving the proceeds and then disbursing the proceeds on the subsequent transaction (Replacement Property). The Qualified Intermediary must be an independent entity who is not the Exchanger or a related party to the Exchanger.

The exchange period begins on the date the taxpayer transfers the relinquished property and ends at midnight of the 180th day thereafter or the due date (including extension) of the taxpayer's tax return for the taxable year in which the transfer of the relinquished property occurs.

The code and the regulations do specifically state a holding period for either of the relinquished or replacement properties. The key factor is "investment intent". IRS has taken the position that property, which was recently purchased before the exchange, was purchased for the purpose of disposing of the property and therefore not held for productive use in a trade or business. In a private letter ruling, IRS states that property held for two or more years would qualify for the minimum holding period. There is, however, case law stating a shorter time period.
Certainly, the longer the property is held before or after the exchange, the more likely IRS will agree that the property was held for investment purposes.

Many investors want to consolidate the numerous properties they own into one or two properties while, some investors want to diversify their investments into multiple properties.
1031 exchanges allow the investor to leverage equity in the existing investment and replenish with a more expensive property, thereby potentially gaining a greater appreciation on the new investment.
Exchanging non-income or low-income property for higher-income producing property creates greater cash flow for the investor.
Numerous investors are ready for retirement and prefer to have their investment property within close proximity to where they retire allowing for.

The main reason taxpayers use Section 1031 to complete a tax deferred exchange is their ability to use the equity they have in their present property to invest in another investment property, while at the same time deferring the payment of any capital gains taxes that might be due. This provides taxpayers with the advantage of having more funds with which to purchase a replacement property, especially a property of greater value.

Yes it does. Sometimes taxpayers who have accumulated a number of properties decide they would be better off, especially from a management viewpoint, if they exchanged their numerous properties and replace them with a single property. Some taxpayers decide just the opposite, they own one property and would rather have a diversification of their investment into two or more properties. In today's marketplace, taxpayer's are using Section 1031 to defer their taxes and consolidate or diversify their investments.

In many cases, taxpayers who have sold their properties find out after their sale that they could have avoided paying capital gains tax if they had completed a Section 1031 Exchange. Many taxpayers mistakenly believe that the parties must swap their properties, which is not true. The taxpayer may exchange his or her property with someone who is not participating in a 1031 Exchange, but rather is selling their property.

An identification of replacement property can be revoked any time before the identification period ends. The identification period ends at midnight on the 45th day after the closing of the relinquished property.

The identification period of time begins on the date the taxpayer transfers the relinquished property and ends at midnight on the 45th day thereafter. Therefore, the taxpayer has 45 days from the date of the relinquished property transfer to identify a possible replacement property.

The following properties will not qualify for Tax-Deferral Treatment:
(a) Stock in a trade or property primarily held for sale
(b) Stocks, bonds or notes
(c) Other securities or evidences of indebtedness or interests
(d) Interests in a partnership
(e) Certificates of trust or beneficial interests
(f) Chooses in Action
(g) Personal Residence

Real Estate that has been or will be held for income production (rental), investment or used in a trade or business will qualify for 1031 tax deferral. Generally, any type of real estate may be traded for another type of real estate. That means, Hotels, Rental Homes, Multi-Family Dwellings, Commercial Office Buildings, Farmland, Raw Acreage, Leases for more than 30 years may all be exchanged for another type of Real Estate.