This is a case of good news and bad news. The bad news is that the Tax Cut and Jobs Act of 2017 limited §1031 Exchanges only to real property, and eliminated §1031 Exchanges of Personal Property, such as motor vehicles, equipment, franchise rights, and artwork, as well as livestock and other critters raised for commercial purposes. (That is definitely bad news for art investors.) You also cannot exchange partnership interests, notes, stocks, bonds, Certificates of Trust or other such items.
For real estate investors and owners, the good news is that real property still qualifies for a §1031 Exchange. All real property is considered like-kind to all other real property. That means you can do a §1031 Exchange of farmland for a shopping center, or an office building for an apartment complex. For real estate owners, that affords a great deal of flexibility.
However, only real property held for “productive use in a trade or business or for investment” will qualify for a §1031 Exchange. You cannot exchange a personal residence. A vacation home may qualify, depending upon the number of days it was rented vs. the number of days the owner stayed there for personal use.
You also cannot exchange real property that is “held primarily for sale.” This would include houses built and sold by a builder/developer, and possibly apartments that were converted to condominiums. It also might include a ‘fixer-upper’ that is sold a short time after it is purchased and as soon as it has been renovated. If an investor attempts to do an exchange too soon after the acquisition of a property, the IRS might challenge whether it was acquired truly for investment as opposed to resale.
Unfortunately, there are no clear guidelines to determine whether real property was held for investment as opposed to resale. Tax courts have analyzed the particular facts and circumstances and considered a number of factors in making this determination.
If you need guidance on your particular situation, call the experts at Madison 1031 – a Qualified Intermediary (QI) — to discuss whether a §1031 Exchange makes sense for your real property.
