The term original use isn’t a core concept by itself, but understanding “use” is essential. The 1031 exchange, also known as a like-kind exchange, allows an investor to defer paying capital gains taxes on the sale of a property if they reinvest the proceeds in a similar or “like-kind” property.
The term “use” in this context refers to the intent or purpose for which the property is held. For a 1031 exchange to be valid:
- Held for Productive Use in a Trade or Business or for Investment: Both the property being sold (relinquished property) and the property being acquired (replacement property) must be held for productive use in a trade or business or for investment. Properties held for personal use are not eligible for a 1031 exchange.
The “original use” of a property could be construed as the use or purpose for which it was first acquired. While this isn’t a technical term used frequently in the 1031 exchange context, understanding the intended use of a property is crucial to determining its eligibility for a 1031 exchange.
For example, if a property was originally acquired for use as a primary residence but later converted into a rental, its “original use” would have been as a residence. However, its current use as a rental might make it eligible for a 1031 exchange.