A 1031 exchange is one of the most powerful tools available to real estate investors. However, there is often confusion around what qualifies for a 1031 exchange, especially when it comes to the “like-kind” property requirement.
What Does “Like-Kind” Mean?
The “like-kind” requirement in a 1031 exchange simply means that the investor must exchange one form of real property for another. This could include transactions like selling an apartment complex to purchase a warehouse or selling a retail center to purchase an office building.
Many people believe this requirement means you are limited to exactly the same type of property, such as selling an office building to buy another office building, but that is not the case. As long as the properties in the transaction are used for an investment purpose or for the purpose of a business, there’s a good chance they will qualify under the “like-kind” requirement.
Properties that Qualify for a 1031 Exchange
If you are a real estate investor, you will be happy to know that the list of qualifying properties is long and includes most of the common property types used for investment purposes.
Nearly all forms of commercial property are included under the “like-kind” provision of a 1031 exchange. As long as the building exists and it is being purchased for an investment or business purpose there’s a high likelihood that it will qualify.
As with commercial properties, nearly every form of residential property qualifies for a 1031 exchange. The major exception to this is your personal home, which does not qualify.
While improved properties are great, another asset that qualifies for 1031 exchange is unimproved properties. Unimproved property simply means no major development has taken place on the land. Under the “like-kind” provision, you could sell improved property to buy unimproved property, or vice versa.
Rights, Easements and Interests
Other, more obscure forms of real property ownership that qualify for a 1031 exchange are rights, easements and interests.
Rights include everything from mineral and air rights to water rights, oil and gas rights and development rights. Although not technically a physical property in most cases, these rights have been deemed acceptable for a like-kind exchange because they represent an interest in real property and could be sold at a gain.
Easements are another form of right that gives permission to cross someone else’s land for a specific purpose. Many easements involve the right to ingress and egress, while others involve utility or pipeline easements.
Interests include tenancy-in-common, leasehold and Delaware Statutory Trust interest, as well as New York cooperatives. These interests can be traded for other forms of real property in a 1031 exchange, with certain caveats that go beyond the scope of this article.
While all of these forms of ownership do qualify for 1031 exchange, they often follow stricter guidelines than the more common forms of ownership. We highly recommend doing your own research and consulting with an expert if you are considering a 1031 exchange for your right, easement or interest.
Although the list of qualifying properties is long and includes the most common types of real property that you are likely to run into, there are a few forms of ownership that do not qualify under the “like-kind” requirement.
Examples of property that does not qualify for a 1031 exchange include:
Luckily this list is much shorter than the list of properties that do qualify, and there’s a good chance you wouldn’t be trying to do a 1031 exchange with them anyway.
We hope this article gave you a good understanding of what qualifies under the “like-kind” provision of a 1031 exchange. What seems like it could be a restrictive provision at first is actually extremely flexible and allows investors to successfully exchange the most common forms of real property ownership.
Our team at Marzo Capital Group has helped our clients navigate numerous 1031 exchanges, and we would be happy to assist you as well. If you are ready to start moving forward with a 1031 exchange, or just have additional questions about how one might work for your specific situation, schedule a consultation with one of our experts today.
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