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What Qualifies for a 1031 Tax Exchange?
The Internal Revenue Service offers four types of real estate classifications:
- Personal Property: Property held for personal use only.
- Dealer Property: Property held primarily for sale.
- Business Property: Property that is held for use in trade or business.
- Investment Property; Property held primarily for investment purposes.
Only business and investment properties qualify for a 1031 tax exchange. However, both the property sold and received must be "like kind" property. "Like-kind" property refers specifically to the use of the property and not its quality. Interest in a partnership cannot be traded for an interest in another partnership, but the partnership as an entity can exchange real estate it owns for other like-kind real estate.
Interest in a lease of real property, with a term of 30 years or more, is considered "like-kind" to other real property. However, the receipt of prepaid lease payments in an exchange for a 30-year or longer lease is taxed as ordinary income and will not qualify for tax-free exchange treatment.
Assets of a business can be exchanged for like-kind assets of another business and can be considered a "like-kind" exchange. However, the like-kind requirements for personal property are much more stringent than for real property.
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What is the Boot Test?