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Under IRC Code Section 1031(a)(1), “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 productive use in a trade or business or for investment.
The definition of “like kind” as used in Section 1031(a) has reference to the nature or character of the property and NOT to its grade or quality. One kind or class of property may not, under that section, be exchanged for property of a different kind or class. Therefore, the fact that real estate is either improved or unimproved is not material. The “type” of real property does not matter as long as the property is “used” by the taxpayer for productive use in a trade or business or for investment. Conversely, when involved in an exchange of “personal property”, the like-kind and like-class issues are very specific. Please feel free to contact our office for further details on personal property exchanges and their specific requirements.
Examples of Real Property Like Kind Properties:
• Single Family Rentals
• Farms/Ranches
• Office/Commercial
• Motels/Hotels
• Golf Courses
• Apartment Buildings
• Raw Land
• Retail property
• Industrial property
• Leasehold interest of 30 years or more
As an example: A taxpayer can exchange a “single family rental” for a “hotel” and the properties will be considered “like-kind” and will qualify under IRC Code Section 1031 provided that all other requirements of the code section are met. “Although the like kind rules were expanded many years ago, it is still a topic of confusion for many taxpayers” reports Pamela Baldwin-Flores, AVP of Business Development for Accommodator Finance Co.
Disregarded Entity Issues:
General Rules under IRC Code Section 1031:
A) Any natural or legal person (individual, partnership, trust, corporation, etc.) may do an IRC Code Section 1031 exchange.
B) The Seller of the Relinquished property (generally as determined by the status of legal title) must also be the Buyer of the Replacement property. (i.e. John Smith, an unmarried man holds title to the Relinquished property, then John Smith, an unmarried man must acquire title to the Replacement property.
EXCEPTION to Rule B above:
If the Seller of the Relinquished property OR the Buyer of the Replacement property is a “disregarded entity” (See Treasury Reg. Code Section 301.7701) or the “owner” of a disregarded entity, then the entity is treated as if it does not exist and the owner and entity are, if effect, interchangeable as the Exchanger. (i.e. John Smith, an unmarried man holds title to the Relinquished property, then The John Smith Irrevocable Trust dated 7/22/08 where John Smith is the Trustee may acquire title to the Replacement Property due to the fact that the “Trust” uses John Smiths’ Individual Tax ID number and is therefore considered a “disregarded entity”.
EXAMPLES of Disregarded Entities:
• Trusts that do NOT have their own taxpayer ID number
• Single Member LLC’s
EXAMPLES of Non-Disregarded Entities:
• General Partnerships
• Limited Partnerships
• S Corporations
• C (“regular”) Corporations
Recently the State of New Hampshire released NH Declaratory Ruling 7707 6-2002.doc alerting clients that the use of Disregarded Entities May Cause Section 1031 Exchanges to fail for New Hampshire Income Tax Purposes. “Due to varying state regulations, it is ALWAYS recommended and prudent for a Taxpayer to be represented by legal and/or tax advisors that specialize in 1031 Tax Deferred Exchanges when becoming involved in any 1031 exchange transaction, especially when holding title in an entity name” warns Kevin Levine, Executive VP of Accommodator Finance Co.
Like Kind Property:
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