Q: What Does ‘Like-Kind’ Mean in a 1031 Exchange?
A: As you are probably aware, a 1031 Exchange refers to a provision in the U.S. tax code, which allows real estate investors to sell or dispose of a piece of real property and purchase another piece of “like-kind” property without incurring any short-term tax consequences. But what does like-kind mean? Well, like kind does not mean exactly what you might think it does. Here are a few things that help to define “like-kind”:
- The property being disposed and the property being acquired must be used for business or investment purposes. In other words, your personal residence, vacation or second homes do not qualify.
- The properties do not need to be physically similar. For example you can exchange a 5 unit apartment building for a shopping center or a piece of land that you plan to develop.
- The properties must be sold and acquired simultaneously (known as a ‘Simultaneous 1031) or within 180 days (known as a Delayed 1031.)
- The property may not be an improvement (e.g. a building) that does not include the land.
- Both the disposed and acquired properties must be in the U.S.
- 1031 exchanges do not include inventories, stocks, bonds, debts, securities, partnership interests, or trust certificates.
- 1031 exchanges can be entities if they are a Delaware Statutory Trust (DST.) This means you can exchange a piece of real property for an ownership interest in a DST.
Q: What if I do not find and acquire another property within 180 days?
A: You actually have 45 calendar days to identify the property you will acquire. If you are undecided on multiple properties, you can list up to three possible properties for exchange. Failing to fulfill the acquisition portion of the exchange will cause the sale of the disposed property to become taxable.
Q: What if the acquired property is less valuable than property being sold?
A: You will be taxed on the difference (a term referred to as “boot.”)
Q: What if I lived in the property?
A: If at least during two of the last five years, you lived in the property (as your permanent, legal residence), you can claim $250,000 in tax-free profit ($500,000 if you are married filing jointly.)
If you are considering or planning a 1031 Exchange, or if you would like to know more about these Exchanges, it is advisable to involve a qualified intermediary. We can help - contact us!