Five Things To Know About The "Like-Kind Property" Specifications Regarding 1031 Tax Exchanges

There are some significant tax benefits to be aware of when it comes to selling and acquiring a property through a rental property 1031 tax exchange. However, there are also certain requirements you'll need to meet to qualify a real estate transaction as such.

The following are five things to know about the "like-kind property" specifications regarding 1031 tax exchanges. 

The IRS requires that the property must be of "the same nature or character" as the sold property.

One of the main requirements to be aware of when it comes to rental property 1031 tax exchanges is that both the property sold and the property acquired need to be of "the same nature or character." This requirement can cause some confusion.

Basically, this requirement just means that you can't, for example, sell an investment property and get a vacation home instead in a 1031 exchange. 

Properties involved need to be considered investment properties.

A rental property 1031 tax exchange needs to involve the exchange of investment properties. You therefore shouldn't attempt to take advantage of the tax savings of a 1031 tax exchange unless you invest in real estate. 

There are not any specific time requirements regarding how soon you sell a property acquired through a 1031 tax exchange.

Technically speaking, you are able to sell the property you acquire whenever you want to after a 1031 tax exchange.

However, in practice, this type of arrangement is more often used when the one who acquires a property is planning on holding on to the newly acquired property for some time. A 1031 tax exchange usually involves investing in a rental property or a property that is expected to appreciate in value over time. 

The structure or function of the properties involved in the exchange doesn't have to be exactly the same.

One common point of confusion with a rental property 1031 tax exchange is that the "like-kind" requirement makes people assume that both properties have to have the same function. For example, some individuals assume that an office must be exchanged for an office or a duplex for a duplex.

In fact, the "like-kind" requirement really just means that both properties have to be held as investments and not as primary residences, for example. 

You may not be able to qualify a property acquisition as a 1031 exchange if you sell it quickly for a large profit.

A property you intend to fix-and-flip might qualify as an investment property in your mind. However, it's important to realize that you might not be able to acquire such a property through a 1031 tax exchange.

In most situations, a property that you wish to sell right away for significantly more than you acquired the property for won't qualify for a 1031 tax exchange.