Like-Kind Exchanges

Some taxpayers take advantage of exchanges and the tax deferral available under IRC §1031 and later convert their former rental house to a principal residence to qualify for the tax exclusion available under IRC §121.

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Investors desiring the tax deferral benefits of §1031 exchanges coupled with the advantages of fractional ownership increasingly are seeking the popular alternatives of tenant-in-common (“TIC”) or Delaware Statutory Trust (“DST”) co-ownership.

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IRC Section 1031 does not limit like-kind property to certain types of real estate. The types of real estate which can be exchanged are extremely broad . The term refers to the nature or character of the property, rather than its grade or quality. In many cases, an easement can be exchanged for a fee interest.

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Sellers of farms and ranches are able to take advantage of two different tax code sections to minimize capital gain tax liabilites. By utilizing all the opportunities available in the tax code, many ranch and farm owners can meet their investment objectives and defer capital gain taxes! Often some of the property can qualify for tax exclusion under IRC §121 and the remainder can qualify for tax deferral under IRC §1031.

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The "Green Movement" has gone from fad, to trend, to global initiative. As a result, commercial property owners are increasingly challenged to respond to demands for greater sustainability and social accountability.

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Section 1031 of the Internal Revenue Code (IRC) allows an owner of any business or investment property to defer paying federal and state capital gain taxes and depreciation recapture if they purchase a like-kind property following the rules and regulations of the tax code.

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IRC §1031 states that property "held for productive use in a trade or business or for investment" must be exchanged for like-kind property. There is much  confusion and misinformation among real estate agents and investors on the issue of what is viewed as "held for investment."

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Leasehold interests may be either relinquished property or replacement property in an exchange. [Reg. §1.1031 (a)-1 (c) (2)] A leasehold interest with a remaining term of 30 years or more is considered like-kind property to a fee interest in any other real estate held for productive use in a trade or business or for investment.

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IRC Section 1031 does not limit like-kind property to certain types of real estate. The term refers to the nature or character of the property, rather than its grade or quality.

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The term like-kind property isn't specifically defined in the tax code. Any real property held for productive use in a trade or business or for investment can be considered like-kind property.

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Real estate investors engaging in a 1031 tax deferred exchange transaction may want to consider acquiring oil and gas related properties in the energy sector rather than the more typical real estate investment property.

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Many exchangers are currently acquiring oil and gas investments using exchange proceeds resulting from the sale of traditional residential or commercial real property in order to diversify their investment portfolios.

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Internal Revenue Code Section 1031 allows investors to exchange either like-kind real or personal property for other like-kind real or personal property. Although the rules for like-kind real estate are fairly broad, the rules to exchange personal property for like-kind or like-class specify that an Exchanger can only receive tax deferral if the sale of personal property is exchanged for the purchase of personal property that falls within the same Product Class or General Asset Class.

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Most real estate agents and brokers are familiar with the changes created by the 1997 Taxpayer Relief Act. This Act repealed the old §1034 rollover provision and one-time exclusion of $125,000 at age 55.

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