Like-Kind Property in a 1031 Exchange
A 1031 exchange is a particular real estate regulation that applies to commercial properties where ownership can be transferred from one space to another without having to pay taxes. Ideally, a series of 1031 exchanges can allow a business to profit when the final property is sold for cash. Within the parameters of a 1031 exchange, businesses have the opportunity to make considerable gains from investing in one property and swapping it for another space of a similar nature. These properties are named “like-kind” properties when referring to specific commercial real estate properties that can be swapped under the terms of a 1031 exchange.
What are the qualifications for like-kind property?
Regarding property that meets the qualifications for use in a 1031 exchange, the term “like-kind” refers to the nature of the property itself rather than the form of the investment. According to the IRS, like-kind property is “property of the same nature, character and class” and the “quality or grade does not matter.” The property is considered to be like-kind regardless of improvements.
The types of property that qualify for a 1031 exchange are extremely broad. Any real estate used in a productive manner for business, trade or investment suffice. Some examples include vacant land, commercial buildings, hotels or motels, retail buildings, office buildings and restaurants. An apartment building can be exchanged for a vacant lot, or a business’s property can be exchanged for another corporate space. In most cases, the qualifications for properties to be considered “like-kind” are liberal.
Are there any like-kind property limitations?
When investing in commercial real estate, it’s important to understand the specific restrictions associated with like-kind property since the qualifications are rather broad.
For instance, personal property does not fall within the parameters of like-kind property. In order for the space to be eligible for a 1031 exchange, the real estate or property cannot have solely served a personal function and must have been held for use in a trade, business or investment. This limitation is intended to exclude primary or secondary residences. Additionally, “dealer property,” or property held mainly for resale purposes, is excluded and does not qualify.
Some geographical restrictions also exist. Though state-to-state exchange is permitted and very common, real estate property within the United States is not like-kind to property outside of the United States. Lastly, stocks, bonds, securities and interests in partnerships are excluded from qualifying as like-kind property.
Is there a time limit on like-kind property investments?
The sale and acquisition of a replacement property do not have to be simultaneous. If the 1031 exchange is not simultaneous, the 45-Day Replacement Identification Window Rule requires that the replacement real estate must be selected and identified within 45 days. The 180-Day Purchase Window Rule requires that the investor also closes on the acquired property within 180 days. This is a common type of exchange, known as a delayed like-kind exchange.
Your company must understand these qualifications and parameters of like-kind property to optimize your opportunities to earn a profit on your business’s commercial real estate investments.
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