1031 Exchange Like-Kind Requirements

The 1031 Exchange process allows taxpayers to exchange “like-kind” property. For many, the definition can be confusing when it is rather simple.

When exchanging real property, the code states that “all real property is like-kind to all real property”. The IRS also says,

“Both properties must be held for use in a trade or business or for investment. Property used primarily for personal use, like a primary residence or a second home or vacation home, does not qualify for like-kind exchange treatment.”

To put it simply, if you are not using the property for personal use, it should qualify for 1031 treatment. Even if you own a rental property that you use on a rare occasion, that could qualify for the 1031 Exchange (review Private Letter Ruling 2008-16 or our article on the 1031 Exchange of Vacation Homes).

Other assets that are not “like-kind” under the regulations would consist of:

  • Property held as inventory or stock in trade
  • Notes, stocks and bonds
  • Partnership interests

Through Revenue Ruling 2004-86, the IRS ruled that a Delaware Statutory Trust (DST) is like-kind as long as the underlying asset meets the requirement that it was held or will be held for use in a trade or business or for investment. Therefore, many taxpayers have considered the DST as an option for their 1031 exchange.

Feel free to reach out to the professional at Security 1st Exchange to assist with your specific questions. And please consult with your counsel or tax professional as well.