If you’ve heard of the term “like-kind” property, it isn’t explicitly defined in the tax code. What’s more is IRC Section 1031 does not restrict “like-kind” property to particular categories of real estate. Any kind of real property kept for productive use in a business, or trade or investment can be considered “like-kind” property in a 1031 exchange. This term refers to the character and nature of the property, instead of its quality or grade. Real property is typically considered to be of “like-kind” irrespective of whether the properties are unimproved or improved. In a 1031 exchange, real property is required to be exchanged for like-kind real property, and real property is never considered like-kind to personal property.
Properties that are not considered ‘like-kind.’
A Primary or Secondary Residence: An Exchanger’s primary or secondary residence are never considered like-kind, and hence, they don’t qualify for a 1031 exchange. It’s important to note that primary residences qualify for the tax exclusion, with certain constraints, but only under IRC Section 121 – not Section 1031.
Properties held “primarily for resale” or “dealer property” is excluded from tax deferral under IRC Section 1031.
Qualifying Real Property
The different categories of real estate that can be exchanged are extensive. In simple terms, any real estate held for profitable use in an investment, trade, or business – whether improved or unimproved – is considered “like-kind.” However, improvements to real estate refer to the grade or quality, not the nature or character of the real property.
Let’s have a look at a few properties that could be considered like-kind:
- Net-lease property – It refers to a contractual agreement where a lessee pays a portion or all of the taxes, insurance fees, and maintenance costs for a property in addition to rent.
- TIC Properties – TIC is an acronym for tenancy in common. This is a form of fractional ownership in which each owner owns a percentage of the property rather than their individual unit.
- Delaware Statutory Trust – It stands for Delaware Statutory Trust, and it simply means an entity that is used to hold title to investment real estate.
- Rental properties
- Industrial property
- Retail property
- Office buildings
- Hotels or motels
Individual tax situations can differ and can be quite complex. It is always advisable to seek guidance from a tax professional in a specific situation. If you are searching for 1031 exchange commercial properties, call 1031Xchange at 1-888-993-2835 or drop an email: firstname.lastname@example.org