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What Qualifies for 1031? Investment Property v. Inventory

When it comes to qualifying for a 1031 exchange, not all investment property is created equal. IRS Code Section 1031 allows the exchange of property that is “ held for investment.” Within this context, the meaning of the phrase “held for investment” is very specific. Property held for investment does not receive the same tax treatment as property that is held primarily for sale; in fact, investment property and inventory are accounted for differently on a tax return. The confusion arises because most investors consider any property they buy to have some investment potential. They are not aware that property used in certain ways will fall into a different classification.



 



Question Corner

If I sell rental property can I buy land to complete my 1031?

  
Yes, both are “like-kind.” However, land is not a depreciable asset, so be aware that you will trigger some tax consequence on the recapture of the depreciation taken on the improved property. Depreciation taken on a relinquished property cannot be rolled forward into a non-depreciable replacement property.
  Qualified Use Test
Things You Need to Know
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Ron Raitz, CCIM - President

Building ADE with a foundation of educating others on 1031 exchanges, Ron offers continuing education courses for professions which include CPAs, attorneys, realtors, and investor groups. He is also a lecturer in academia at GSU, Mercer Law, Georgia Tech and Emory's graduate real estate programs.