The Internal Revenue Code, Rulings, and Revenue Procedures all document the idea of a 1031 exchange. Yet, there are multiple interpretations of an exchange's application. Investors often misinterpret the definition of like-kind.
Appearing early in the tax code is the phrase, "no gain or loss is recognized if property held for productive use in a trade or business, or for investment is exchanged solely for property of a like-kind to be held either for business trade or investment." The paragraph continues citing property that is not eligible for exchange, including stock and partnership interests, among other items. Skipping a bit further will provide limited examples, each of which cites the property's use.
Qualifying a property by its use unhinges the argument of quality or type. Based on this understanding, if you can demonstrate your investment intent, the property qualifies as like-kind in an exchange. The sale proceeds from investment real estate transfer tax-free when your replacement property is an investment as well.
Is your raw land up for sale? Maybe reinvest in a strip mall. Are you selling a Class-B multi-family complex? Consider upgrading your exchange into Class-A. Do you own an office condo that is no longer needed? Think about purchasing a warehouse leased by someone else.
Many smart investors use a 1031 exchange for cycling among various asset classes. Market dynamics might benefit you for selling a property that has highly appreciated while reinvesting the proceeds in a different type of property with more upside.
As always, review your situation with your trusted tax and legal advisors. Including an experienced Qualified Intermediary (QI), like Advantage Wealth Solutions Exchange, LLC, is imperative to implementing your strategy.
Click here for examples of like-kind property.