Excluded Property refers to certain types of property that are not eligible for a 1031 exchange. This is based on Section 1031 of the U.S. Internal Revenue Code, which allows for the deferment of paying capital gains taxes when an investor sells a property and reinvests the proceeds in a “like-kind” property.
The following types of properties are typically excluded from 1031 exchange:
- Personal residences: These are properties used for personal use and not for business or investment purposes.
- Inventory or stock in trade: These are items that are part of the normal sales goods of a business. This could include anything from products sold in a retail store to real estate held by a real estate dealer.
- Stocks, bonds, or notes: These financial instruments are not considered like-kind to real property.
- Other securities or evidences of indebtedness: This includes things like a business’s accounts receivable.
- Interests in a partnership: If you own a share of a partnership, you can’t exchange that for real property.
- Certificates of trust or beneficial interests: This could include an interest in a Real Estate Investment Trust (REIT).
Please note that the Tax Cuts and Jobs Act of 2017 made significant changes to 1031 exchanges. Starting from January 1, 2018, exchanges of personal property and intangible property such as machinery, equipment, patents, and other intellectual property are no longer eligible for tax deferment. Only real property qualifies.