Defining Tax Advantaged Like-Kind Property

Posted on June 06, 2017

A key benefit of a 1031 exchange is its ability for investors to shift the focus on their investments from one type of property to another like-kind property and allow their initial investment dollars to continuing growing tax free. For example, an investor can exchange his or her ownership in an old residential rental property in need of repair for ownership in a new retail property located in up-and-coming area where the investor has greater prospects of generating higher rental income.  While a textbook 1031 exchange involves a simultaneous exchange of deeds between two property owners with essentially the same type of property held for either productive use in a trade or business or for investment, the reality of such a well-synchronized transaction is not so simple.

To meet the rigorous requirements of the Internal Revenue Code’s definition of qualifying like-kind property, investors must be aware of the IRS’s do’s and don’ts regarding relinquished and replacement properties.

·        The asset sold and the asset to be acquired DO need to be “held for either productive use in a trade or business or for investment.”  This may include commercial buildings, rental properties, land, machinery, equipment, art or other highly valued assets; it excludes individuals’ personal residences and vacation homes.

·        Assets DO need to be located in the U.S., but they DON’T have to be located in the same state. A seller can take advantage of the wide range of market pricing around the country and exchange a property in Florida for one in Texas.

·        Like-kind properties DO need to be similar in nature, character or class. They DON’T need to be of the same quality.  Many owners choose to upgrade land or property before selling.

·        Replacement properties DO need to have a value that is equal to or greater than the relinquished properties.

·        Sellers DON’T have to exchange one property for another singular property. Rather, sellers can exchange one property for multiple like-kind properties.

Investors engaging in 1031 exchanges should rely on experienced real estate professional to help identify replacement property that not only provides beneficial tax treatments but that can also maximize their investment returns.

The professionals with Orion Real Estate Group work with investors, developers, property owners and brokers through all phases of real estate transactions, from strategic planning and analysis to financing, negotiation, property management and disposition. For more information, call (305) 278-8400 or email info@orionmiami.com.