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National Association of Realtors: What Types of Properties

NEW YORK, Oct. 31, 2022 (GLOBE NEWSWIRE) — The 1031 exchange is an effective tool for real estate investors and homeowners to exchange one property for another while deferring federal capital gains tax that would otherwise be due if the property were sold. As long as an investor holds the traded property as an investment or is used in the owner’s trade or business, they may be eligible for capital gains deferral on the sale.

The stipulations of a 1031 transaction indicate that the abandoned property and the replacement property must be of the same nature to be considered eligible. But what exactly does “like-kind” mean and what types of properties are eligible for a exchange of the same nature?

What type of property is not eligible for a 1031 exchange?

Before exploring the types of properties eligible for a like-for-like exchange, it is essential to understand what does not meet the requirements.

Ineligible real estate includes:

  • The primary or secondary residence of the investor. Since a like-kind exchange is designed to help investors defer capital gains tax, homeowners cannot take advantage of tax benefits on their primary or secondary residence.
  • Foreign ownership. Like-kind exchange processing is only available for household goods. Thus, investors cannot sell foreign property to buy US property and expect favorable tax treatment of capital gains.

Properties eligible for like-kind exchange

When it comes to real estate, most people think of single-family homes, condos, or apartments. Yet, in the eyes of the IRS, real estate is property consisting of land or buildings.

According to tax law, a good is similar to another if it is of the same nature or the same character, even if it differs in grade or quality. This means that regardless of the current physical condition of an apartment building, an apartment building can generally be exchanged for another apartment building, office building, commercial building, etc.

Similar properties eligible for a 1031 exchange include the following:

  • Ground
  • Landscaped land
  • Condos
  • Apartments
  • Single-family homes
  • Multi-family houses
  • Retail businesses
  • Office buildings
  • Farms or ranches

This list is not exhaustive. It is always best to consult with a team of professionals, including qualified tax, real estate and experienced (QI) intermediaries, before planning to facilitate any 1031 exchange.

Swapping Properties of Different Values

Finding another property to trade that is exactly equal in value to the current property is a challenge, especially in a hot real estate market. If an investor wishes to acquire a replacement property of a higher value than that exchanged, he will defer the capital gains on the total amount of the exchanged property.

However, when an investor trades for a lower value property, they will be taxed on the difference, known as the boot.

For example, if an investor traded a single-family rental property for $500,000 and wanted to replace it with land worth $450,000, then the start-up $50,000 would be subject to capital gains tax.

The essential

Before an investor pursues a 1031 exchange, it is a good idea to work with a real estate agent and a qualified intermediary. Having a strong team in place means fewer opportunities for issues that could cause the exchange to fail, resulting in a taxable transaction.

Contact information:
Caroline Darbelles
Public Relations Specialist
[email protected]
(201) 633-2125

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