1031 Exchanges by Equity Advantage Incorporated

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Exchange ABC's

Creating An Exchange

Frequently Asked Questions

Choosing a Facilitator

The Sexes are not Equal

At least not according to the Internal Revenue Service. You can trade a tractor for a tractor, a truck for a truck, but you cannot trade a cow for a bull! According to Section 1031 of the Internal Revenue Code, animals of different sexes are not "like-kind" and cannot be traded tax-free. Fortunately for investors, the code is much more lenient when dealing with real estate.

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.

What Qualifies?
Any property held for productive use in a trade or business or for investment can be exchanged for like-kind property. Like kind refers to the nature of the investment. Any type of investment property can be exchanged for another type of investment property. A single family residence can be exchanged for a duplex. Raw land for a shopping center. An office for apartments. Any combination will work. This gives the exchanger flexibility to change investment strategies to fulfill their needs.

What are Some Reasons to Exchange?

Cash Flow: Exchange land for improved property

Appreciation: Exchange commercial property for single family rentals that appreciate faster.

Easier Sale: Exchange for a property that is easier to market and sell

Less Management: Exchange rentals for raw land or for property that can be professionally managed

Better Location: Exchange property from a run-down location to a better location

Accomplish Goals: Exchange one large property into multiple properties to leave for heirs

Q: WHAT DOES NOT QUALIFY?

A: What you cannot trade

You cannot trade partnership shares, notes, stocks, bonds, certificates of trust or other such items which are not real estate. You cannot trade investment property for a personal residence, property in a foreign country or "stock in trade." Houses built by a developer and offered for sale are stock in trade. If an investor buys "fixer-uppers" and sells them as soon as they are improved, the properties may be considered as stock in trade and cannot be exchanged. If an investor attempts to exchange too quickly after a property is acquired or trades many properties during the year, the properties may be considered stock in trade. Moving property quickly or using real estate for purposes other than investment can disallow exchange benefits. Persons dealing with stock in trade are called "dealers" and are not allowed to exchange their real estate unless they can prove that it was acquired and held strictly for investment. There are no clear guidelines as to what constitutes being a dealer. The purpose and motivation behind the acquisition and use of real estate, how long the property is held and the principal business of the owner may be considered when determining if a real estate is dealer property.

In the majority of circumstances, the question of whether a property is like-kind never becomes a problem. If a question arises as to whether a particular property is like-kind, it is far better to ask an expert than to waste an opportunity to defer taxes. The broad definition of "like-kind" provides every investor with a method of creating an investment program that maximizes future wealth through tax deferment.