NEW YORK, Oct. 31, 2022 (GLOBE NEWSWIRE) — The 1031 exchange is an effective tool for real estate investors and property owners to exchange one property for another while deferring state capital gains tax that would be due if the property were sold. As long as an investor holds the exchanged property as an investment or it is used in the owner’s trade or business, they can defer capital gains from the sale.
The terms of a 1031 transaction indicate that both the surrendered property and the replacement property must be of the same kind to be considered eligible. But what exactly does similar mean and what types of characteristics qualify for a like-minded exchange?
What type of property does not qualify for a 1031 exchange?
Before examining the property types that qualify for an exchange alike, it’s important to understand what doesn’t qualify.
Ineligible properties include:
- Main or secondary residence of the investor. Because a like-for-like exchange is designed to help investors defer capital gains taxes, homeowners are unable to take advantage of the tax benefits at their primary or secondary residence.
- Foreign Property. Equal treatment is only possible for domestic property. Thus, investors cannot sell a foreign property to purchase a US property and expect favorable tax treatment on capital gains.
Properties that qualify for a peer exchange
When it comes to real estate, most people think of single family homes, condominiums, or condominiums. However, in the eyes of the IRS, real estate is property made up of land or buildings.
According to tax law, things are of the same kind if they are the same in type or quality, even if they differ in degree or quality. This means that, regardless of the current structural condition of an apartment building, an apartment building can in principle be exchanged for another apartment building, office building, retail property, etc.
Qualification…
