What
qualifies for a 1031 Exchange?
The
following types of properties qualifies for a 1031 exchange:
A)
Real property
B)
Personal property
Real
property:
·
Real property includes land and property
attached to land in a relatively permanent manner.
·
Personal property that is affixed to real
property in a relatively permanent manner is a fixture and
is, therefore, considered to be part of the real property.
·
Exchanges of real property qualify even if
they are not similar. For e.g. land can be exchanged for a
building.
·
The property must be defined as real property
by the state in which it is located.
·
Both the relinquished as well as the
replacement property must be located within the US states.
It is not necessary that both the properties should be
located within the same state -- one property can be located
in Ohio while the other in Florida.
·
If outside the US, both the relinquished as
well as the replacement property must be located outside the
US. You cannot exchange a real property located within the
US with a real property outside the US to qualify for 1031
exchange.
Personal
Property:
·
Personal property includes all property that
is not real property or a fixture. A personal property is
movable property. On the other hand real property is
immovable property.
·
According to Treasury Regulations, a
like-class personal property satisfies the definition of
like-kind. Like class property is defined as depreciable
tangible personal properties within the same General Asset
Class or within the same Product Class. General Asset Class
is provided in Rev. Proc. 87-56 for depreciation. Product
Class is provided in the North American Classification
System published by the Office of Management and Budget.
·
If two properties are not within a General
Asset Class, it can still be classified as
like-kind properties if they are within the same
Product Class. This effectively implies, a property can
qualify if it is in either the General Asset Class or the
Product Class. However, the property should not be
classified in both classes.
·
In the case of intangible personal property,
the type of right involved and the underlying property to
which it relates should be considered. An exchange of a drug
patent can qualify only if it exchanged for another drug
patent. The drugs need not be the same or similar. Unlike
tangible personal properties, intangible personal properties
do not have any classes.
·
Generally, an exchange of stock does not
qualify. However, an exchange of stock qualifies if it is
related to a tax-free reorganization.
·
Although an exchange of stock does not
qualify, Section 1036 can be used for –
a)
exchange of common stock for common stock in the same
corporation
b)
exchange of preferred stock for preferred stock in
the same corporation
c)
exchange of voting common stock for non voting common
stock in the same corporation
d)
the exchange in the same corporation can be between
two stockholders or between the stockholder and the
corporation.
In
all the above cases, no gain or loss is recognized. Section
1036 does not apply to exchanges of common stock for
preferred stock; stock for bonds of the same corporation, or
any kind of stock in different corporations.
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