A 1031 exchange is a powerful wealth-building tool that allows you to trade up, consolidate, diversify, leverage or relocate your property investments while avoiding capital gains and recapture taxes. With a 1031 exchange, you avoid taxes each time you move from one investment property to the next. This allows you to keep and reinvest all of your capital, rather than sharing it with Uncle Sam.
While a 1031 exchange can offer powerful tax-deferral benefits to an investor, the transaction must meet stringent IRS requirements. One of these requirements is that the relinquished property and replacement property involved in the 1031 exchange are “like-kind.”
In many transactions, “like kind” is fairly straightforward. For example, an investor relinquishes one multi-family rental property and replaces it with another multi-family rental property. In this scenario, there is little doubt that the replacement property is similar to the relinquished property. But are there scenarios where “like-kind” can get more confusing?
There are many ways that two seemingly different parcels of real properties can actually be considered “like-kind” for purposes of 1031 exchanges. These include:
~ One property can be exchanged for two or more properties
~ Multiple properties can be exchanged for a single property
~ Investment property can be exchanged for business property, and vice versa.
~ Unimproved real estate can be exchanged for improved real estate
~ Improved real estate can be exchanged for unimproved real estate
~ Full ownership can be exchanged for an undivided percentage interest among multiple owners
However, there are some transactions that do not qualify as “like-kind” for purposes of a 1031 exchange. The biggest issue often involves an investor’s personal residence. Simply put, IRS rules prohibit a personal residence from qualifying for 1031 exchanges under any circumstance.
The IRS is notoriously unforgiving with mistakes. When you are considering a more complicated 1031 exchange, it is important to consult with a professional well-versed in these types of transactions.
The 1031 experts at Qualified Intermediary Capital Advisors have been helping investors with all aspects of 1031 exchanges for more than a decade. Whether this is your first 1031 Exchange or your tenth, our team is ready to help you with all aspects of the transaction. From identifying suitable properties nearby or across the country to taking care of every last filing detail, our team works closely with you, your attorneys and accountants to ensure that all facets of the transaction are accomplished with the 100% accuracy required to meet the stringent IRS rules and regulations governing 1031 Exchanges.