|
1. What is Like-Kind?
The question of "what is like-kind property" often confuses investors. Section
1031 of the Internal Revenue Code allows real estate investors or business
owners to trade property held for productive use in trade or business or for
investment for similar property without paying capital gains tax. Similar
classes of property are called "like-kind." The class of real estate is very
broad and includes vacant land, office buildings, houses, warehouses, shopping
centers and any other form of real estate held for investment purposes. Any
form of investment real estate can be traded for any other without being taxed.
Even leases with more than 30 years remaining are considered investment
property and can be traded for other real estate. There is hardly any form of
real estate that the typical investor might acquire in his lifetime that cannot
be traded for any other.
2. What Time Periods Must You Work Within?
The traditional like-kind exchange is referred to as a "simultaneous exchange."
A and B both own investment property, and both want to swap. On the day of
settlement, A conveys a deed to B, and B conveys a deed to A. This is the
traditional, classical 1031 exchange.
Congress was concerned about the expansion of this like-kind exchange concept.
Accordingly, in 1984 it puts two major limitations on the Starker
(non-simultaneous) exchange. First, the property to be received by the taxpayer
must be identified as such before the 45th day after the date on which the
property is transferred.
Second, the new property must be received no later than 180 days after the
taxpayer transfers his original property, or the due date with extension of the
taxpayer's return for the year the transfer is made.
3. Is it Possible to Combine a IRC 1031 Exchange with the Universal Exclusion?
It is possible to work with both IRC 1031 and the Universal Exclusion on the
same parcel of property. Examples of this situation would include:
A working farm containing the farmer's residence...the working land would fall
under section 1031 rules while the farmers home would fall under the Universal
Exclusion.
A duplex or similar plex with one unit owner occupied (U.E.), the balance
tenant occupied (1031).
A residence (U.E.) containing a home office (1031).
4. Is it possible to purchase the replacement property prior to disposing of
the relinquished property?
Through the use of the Reverse Exchange a property may be acquired today to
replace a property yet to be relinquished. This technique though complex is
currently gaining in popularity due to the issuance of Revenue Procedure
2000-37. There are three primary versions of this transaction in use today:
5. Does All Construction Need to be Completed within 180 Days in an Improvement
Exchange?
To answer this question properly we must first address the identification of an
improvement exchange property. The identification will qualify if the normal
identification rules are followed and if "as much detail is provided regarding
construction of the improvements as is practicable at the time the
identification is made."
Property not completed will still qualify. The Replacement Property will
qualify as like-kind property even if it is only partially constructed (e.g.,
20 percent complete) as of the date the Replacement Property is conveyed to the
Exchanger, provided the Replacement Property is real estate. The IRS takes the
position that personal property will not be treated as like kind unless it is
100 percent complete as of the date it is conveyed to the Exchanger. Treas.
Reg. §1.1031(k)-1(e)(5), Examples (ii) and (iii).
|
