Question

What property qualifies for § 1031 treatment? What are some examples?

Answer 1

Qualifying property is mainly defined, for both the property being transferred as well as received, as realty used for the purpose of investment or business. Therefore, investment realty (held for either rental or appreciation) can be exchanged for real property used in a business or trade. Partial realty interests such as perpetual mineral and conservation easements or rights of oil are exchangeable with other types of realty (inclusive of a contract of land in which equitable title has been transferred), even a lease with at least 30 years still remaining (inclusive of the options of renewal) are allowed to be exchanged for a fee-simple interest in realty.

In case non-like-kind property is received (inclusive of any relief of debt at the end of the exchange), there will be a recognition of partial gain; there is no all-or-nothing need of rolling over all of the existing debt and equity to the replacement realty.

For example:

--When a restaurant is damaged by fire, the insurance proceeds should be used to build or purchase another one. As a result of an eminent domain proceeding under IRC 1033(g) an involuntary conversion will be categorise as an exception to § 1031 treatment like-use requirement and uses a like-kind standard similar to § 1031

--When a shopping center can be exchanged for a multifamily apartment building or property . In such scenario, investors will specifically use the profits as a down payment and cover the remaining of the purchase with multifamily apartment loan or financing.