Solomon C, Lao, CCIM. Your Partner In Commercial Real Estate.
What Property Qualifies for 1031 Treatment?The Exchanger must hold the relinquished property for investment or for "productive use in their trade or business" to qualify for 1031 treatment. The Exchanger's purpose in holding the property, rather than the type of property, is the critical issue. The following are examples of qualifying properties:
Bare land Farmer's farm
Commercial rental Residential rental
Industrial property Doctor's own office
30-year leasehold interest Percentage interest in investment property
The intent to hold the property for personal use will prevent the property from qualifying for 1031 treatment. Therefore, second homes will not qualify for 1031 treatment unless the property owner changes how they treat or use the second home. For example, a taxpayer could " convert" their second home to a valid exchange property and establish this intent by properly renting the property and holding it as a legitimate rental property. Consultation with a tax advisor is important whenever a taxpayer changes how they intend to hold property.
The intent to hold property "primarily for sale" will prevent the property from qualifying for 1031 treatment. Most properties owned by developers, builders and people who perform rehabilitation work are held primarily for sale and may not be the subject of an exchange. When these properties are sold, they are subject to ordinary income taxes rather than capital gain taxes.
Partnership interest, notes secured by real property, contract vendors' interests and foreign property (under the Revenue Reconciliation Act of 1989) do not qualify for 1031 treatment.
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