A 1031 exchange, also known as a like-kind exchange, is a strategy used in the United States that allows an investor to defer paying capital gains taxes on the sale of an investment property by reinvesting the proceeds from the sale into a new property of like-kind. It’s named after Section 1031 of the Internal Revenue Code, which outlines the rules and regulations for this kind of transaction.
Real Property refers to land and anything permanently attached to it, such as buildings or other structures. This includes both residential and commercial properties. When participating in a 1031 exchange, the real property sold and the real property acquired must be held for investment or used in a business.
The properties involved in the exchange must be of “like-kind,” which, in the realm of real estate, is a broad term. For example, you could exchange an apartment building for a retail center, or a piece of raw land for an office building, as they are all considered real property.
Understanding the definition of Real Property is crucial in the 1031 exchange industry to ensure that the properties involved in the exchange are eligible, and the transaction complies with the regulations set by the IRS. Note that certain types of properties, such as those held primarily for resale or personal residences, are generally excluded from qualifying for a 1031 exchange.