1031 investment property is real or personal property held for the proper intent as defined by Internal Revenue Code § 1.1031. 1031 exchanges allow the owner to indefinitely defer the federal and state capital gains and recaptured depreciation taxes triggered when the property is sold and replaced with like-kind property. Taxes are due when the replacement property is sold or deferred in another 1031 exchange.
The proper intent is “property held in a trade, business or investment.” Facts support the proper 1031 investment property intent such as:
- hold time
- rental history
- minimal personal use
- history of purchase and sales, including dates
- how the property is itemized if reported on federal tax return
- history of income or losses
- expertise and financial status of Taxpayer
- time and effort expended
Examples of 1031 Investment Property
Real, tangible and intangible personal property is eligible as 1031 investment property. Examples of real property include:
|Tenants in common||Conservation easements||Oil and gas royalties|
|Mobile home parks||30-year leasehold interests||Vacation rentals|
Examples of tangible and intangible personal property include:
|Livestock||Heavy construction equipment||Fine musical instruments|
|Paintings and sculptures||Gold and silver bullion||Vintage and collectible cars|
|Aircraft||Franchise rights||Sports contracts|
The above examples represent a partial list of 1031 investment property. Real property can only be exchanged for real property as long as the locations of both the new and the old are either within the United States or held predominantly overseas. A United States citizen who works overseas can own a rental property and exchange it for other real property anywhere internationally and defer the capital gain.
Personal property must be like-kind or like-class as defined in one of thirteen general asset classifications or the North American Industry Classification System. If the predominant use is overseas, then the replacement property must also be held predominantly overseas for at least two years post acquisition.
Multi Asset 1031 Exchanges
When a property like a business or farm includes more than one type of property sold, such as real and personal property in a business sale or a primary residence or real and personal property in the sale of a farm or ranch, then each property must be itemized separately to exchange accordingly. Not all property types must be exchanged. Often, equipment is sold and not exchanged for replacement equipment.
A primary residence is not eligible for 1031 consideration, yet under Section 121 the gain is excluded if under $500,000 for a couple filing jointly or $250,000 filing an individual federal tax return. Additionally, the exclusion is available if the home represents their primary residence and the Taxpayer has lived in the home at least two of the past five years. The exclusion is available once every two years
Information provided by Andy Gustafson – firstname.lastname@example.org