Prior to 2020, a 1031 Exchange could be completed on a wide variety of business or personal property. For example, if you owned a construction company, you could sell your old dump truck under a 1031 Exchange and defer capital gains if you would be purchasing another dump truck within a certain period of time.
However, in recent years, Congress has tightened up the 1031 Exchange process and has limited its use solely to “like-kind” real estate.
While that's bad news for people in other sectors, the game is still in play for real estate investors who are looking to lower their tax burden and use their extra money to grow their personal wealth.
However, even with all the new legislation, a common source of confusion still centers around what “like-kind” really means when it comes to the real estate category. It's obviously very broad and encompasses everything from the family home you may live in, to raw land and mineral interests.
The general rule is that property that's eligible for a 1031 Exchange is that which is used for business, trade, or commercial purposes. What is not covered is property that's for personal use, such as your family home or real estate used primarily as a vacation property or second home.
Like-Kind Does Not Mean Identical
Another source of confusion is whether “like-kind” properties must be identical to each other. The answer to this is NO. All real estate that falls within the business, trade, or commercial category is considered “like-kind” to each other. For example, a single-family rental property is considered “like-kind” to a warehouse by the IRS. It's a very broad category and almost anything qualifies as “like-kind” that can be used for business or investment purposes, including:
- Blank lots
- Air BnB's
- A vacation home if they are used less than 14 days for personal use
- Some leasehold interests
- Apartment buildings
- Commercial Warehouses
- Oil and gas leases
Finally, property in one state is also considered “like-kind” to property in another. Both properties simply need to be in the United States to complete a 1031 Exchange under the current IRS rules.
Have Questions About “Like-Kind” Properties?
Our Exchange Agents know that each transaction is different, and you may still have questions about whether the property you are thinking about exchanging would be eligible for the tax-deferred benefits offered by a 1031 Exchange. If you're still unsure, simply call us at (888) 508-1901. We'd be happy to talk to you about your portfolio and help you determine how to move forward in the most tax-efficient way possible.