1031 Like Kind Exchanges and Condos

Can you do a 1031 Like Kind Exchange when you sell a condo?

The answer will depend on several factors.

Like Kind Exchanges, also known as tax deferred exchanges, are defined by Internal Revenue Code (IRC) section 1031. A 1031 Tax Deferred Exchange offers taxpayers one of the last great opportunities to build wealth and save taxes. By completing a 1031 Exchange, the Taxpayer (“Exchanger”) can dispose of investment or business-use assets, acquire replacement property and defer the tax that would ordinarily be due upon the sale. The key is that the property must be "investment or business-use assets".

Section 1031 has permitted a taxpayer to exchange business-use or investment assets for other like-kind business use or investment assets without recognizing taxable gain on the sale of the old assets. The taxes which otherwise would have been due from the sale are thus deferred.

A 1031 Exchange allows investors to defer Federal capital gains tax, state ordinary income tax, net investment income tax, and depreciation recapture on the sale of Investment property if certain criteria are met including:

• • Buy replacement property for equal or greater than sold for and reinvest all proceeds
  • Identify replacement property within 45 days of close of sale
  • Purchase replacement property within 180 days of close of sale
  • Must Sell and Buy property that is considered “like-kind” to each other
  • Process must be handled by a Qualified Intermediary (QI)
  • QIs are not regulated by the federal government nor by most state governments. Therefore, it is essential that taxpayers ascertain the qualifications and competency of and security provided by a potential QI. Choose one that has extensive experience, attorneys, CPAs and 1031 professionals on staff, provides financial security and insurance, and that has safeguards in place to protect exchange funds.

     

    For real property transactions (rental houses, farmland, office buildings, strip malls, condos, etc.) the “like-kind” requirement does not mean selling and buying the exact same type of property. The term “like-kind” refers to the nature or character of the property not its grade or quality. For this reason nearly all real property is like-kind to each other.

    The IRS is actually very broad scoped in the case of real property like-kindness. The regulations state that “all real property is like-kind to all real property”. Therefore, if you are selling a real property interest (anything that you have fee title to) you can look for any kind of real property as a replacement property. The key is that the property being sold must have been for "investment or business-use assets".