1031-Six Basic Rules

There are six basic rules to consider when utilizing a tax deferred exchange.


1. All properties must be held for investment.

What Property Qualifies?


I.R.C. §1031 of the Internal Revenue Code reads "no gain or loss shall be recognized if the property transferred is actually exchanged for other like-kind property",


The term "like-kind" is one of the most widely confused concepts by investors who erroneously think they must acquire a property exactly like their relinquished property. They are surprised to learn a wide variety of properties can be considered "like-kind".


The Definition of Like-kind


"Like-kind" does not refer to the type of property. Instead it addresses the use of the property. Property which qualifies as being like- kind for non-recognition of gain treatment is defined as either (1) held for productive use in a trade or business or (2) held for investment. Both the property transferred and the property received must be held for productive use in a trade or business or for investment. For example, an investor can exchange out of bare land held for investment and into property held for business purposes such as an apartment building. Income producing agricultural property such as an

orchard, farm or timberland would also qualify under this definition. A duplex used as a primary residence and a rental is (on the rental side) like-kind to other investment property. There is tremendous flexibility for the astute investor.


Examples of "like-kind"


-A condominium for a duplex


-A rental house for a 4 unit rental


-Raw land for an apartment building


-Ranchland for an office building


-An apartment building for several waterfront rentals


-Several rental houses for an office building


Non Qualifying Property Under§1031


Section 1031 permits the exchange of property with the following exceptions:


-Stocks, bonds, or notes, other securities or evidences of indebtedness or interest (example: notes secured by deeds of trust)


-Domestic property to foreign property


-Stock in trade or other property held primarily for sale (inventory)

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