The term “like-kind” property isn’t specifically defined in the tax code. IRC Section 1031 does not limit “like-kind” property to certain types of real estate. Any real property held for productive use in a trade or business or for investment can be considered “like-kind” property. The term refers to the nature or character of the property, rather than its grade or quality. Real property is generally considered to be of “like-kind” regardless of whether the properties are improved or unimproved. In a 1031 exchange, real property must be exchanged for like-kind real property and real property is not considered like-kind to personal property.
A Primary or Secondary Residence: An Exchanger’s primary or secondary residence are not considered like kind and do not qualify for a 1031 exchange. It should be noted that primary residences do qualify for tax exclusion, with certain restrictions, but under IRC Section 121 – not Section 1031.
Property held “primarily for resale” or “dealer property” are excluded from tax deferral under IRC Section 1031.
The types of real estate which can be exchanged are extremely broad. Any real estate held for productive use in a trade or business or for investment – whether improved or unimproved – is considered “like-kind.” Improvements to real estate refer to the grade or quality, not the nature or character of the real property. Properties that could be considered like-kind:
Prior to 1989, Exchangers could exchange U.S. property for property outside of the U.S. However, for all exchanges occurring after July 10, 1989, only exchanges involving U.S. property could be considered “like-kind” for purposes of IRC Section 1031.
In other words, real property in the United States must be exchanged for other real property in the United States. Exchangers cannot exchange United States property for foreign property nor visa versa. Exchanging property in one state for property in another is allowed and extremely common.
However, in one Private Letter Ruling (PLR 9038030), an investor was allowed to exchange into the U.S. Virgin Islands as part of a qualifying §1031 exchange.
It’s important to remember that, as with any private letter ruling, it’s important to analyze the unique facts and circumstances of the taxpayer’s situation. The particular Private Letter Ruling mentioned above, allowed an exchange into the U.S. Virgin Islands because it cited a specific portion of the Code (Section 932) and that in accordance that the taxpayer specifically intended to have income derived from sources within the Virgin Islands, and based upon this particular Code Section, the term “United States” was enlarged to include the U.S. Virgin Islands.
Personal property that qualifies for a § 1031 exchange must be “held for productive use in a trade or business or for investment.” In general, qualifying properties must both be in the same General Asset Class or within the same Product Class. The Standard Industrial Classification Manual provides categories for General Asset Classes of depreciable tangible personal property.
It is critical to review any personal property transactions with tax advisors because the rules are more restrictive than for real property. Examples of qualifying personal property exchanges include: