1031 Land: Like-Kind Requirement

1031 Land RequirementOften the question is asked whether in a 1031 like-kind exchange must land be exchanged for land. The answer is found in the like-kind requirement under Internal Revenue Code (IRC) Section 1031. To qualify for consideration in a 1031 exchange, the relinquished or old property and the replacement property must be like-kind. Property is either real or personal property held for productive use in a trade, business or for investment.

Real Property

Real property implies real estate, which can be either improved or unimproved. Improvements or lack of improvements are immaterial for 1031 treatment since the condition relates to the grade or quality of the property and not to the respective kind or class. The 1031 regulations require that property cannot be exchanged for property of a different kind or class. The like-kind requirement refers to the nature or character of the property and not to its grade or quality.

According to IRC Regulation § 1.1031(a)-1(b), the like-kind determination is dependent upon “the respective interests in the physical properties, the nature of the title conveyed, the rights of the parties, the duration of the interests, and any other factor bearing on the nature or character of the properties as distinguished from their grade or quality.”

Consequently, land is considered like-kind with any real property whether that is a single or multi-family residential or commercial property, or water and mineral rights as determined by the respective state law.

Personal Property

1031 exchanges of personal property held for productive use in a trade, business or investment are far more restrictive. Tangible and intangible personal property is eligible for 1031 treatment. Each type of personal property is categorized in one of thirteen general asset classes or North American Industry Classification Codes. Each must be exchanged for the same class or kind of personal property. Furniture must be exchanged for furniture while oil paintings, musical instruments and livestock must be exchanged for like-kind oil paintings, musical instruments and livestock.

State laws may determine the nature and character of the interests, characterizing property interest as real or personal. If the personal property, such as a mobile home, is affixed to the real estate, the home may be considered real property.

Personal property is like-kind to real property. Property held in the United States is not considered like-kind to property held overseas or outside the United States and the Virgin Islands.

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