Even though 1031 exchanges have become quite popular these days, people still have misconceptions regarding this tax-deferring real estate transaction. A 1031 exchange or like-kind exchange allows you to put off tax bills after conducting a swap between two similar properties. However, it seems that not everyone is familiar with or understands the IRS requirements when it comes to such an exchange because some people believe that “like-kind” means identical. More specifically, if they intend to sell a rental house, they think that the law forces them to purchase nothing else than a rental house, but the truth is that in the real estate industry, the term is broader than that, which means that if you put up for sale a property used for business purposes, you have the right to acquire another property, whether we are talking about an office building or even a land, as long as you use it for business purposes. This is what “like-kind” really means. That being said, the next question arises: can I use a 1031 exchange for personal properties?
Residential property is not eligible for a 1031 exchange
Well, in order to provide a correct answer to this interesting question, you have to analyze carefully all the IRS requirements associated with 1031 exchanges and DSTs. First, you have to understand that such a real estate transaction will not keep taxes away from you for the rest of your life. The considerations that you cannot overlook refer to the same taxpayer meaning that the same person can sell and buy the property, identification of the property in no more than 45 days, replacement of the property in 180 calendar days, the property purchased must have equal or greater value than the property sold, among others. More importantly, what most real estate investors and business people know is that the 1031 exchange does not apply to residential or personal properties. However, you would be surprised what some consider for 1031 exchange, from shopping malls, golf courses, trailer parks and parking lots to condominiums, apartments, self-storage facilities, land, hotels and motels. However, you cannot consider eligible for a 1031 exchange partnership interests, inventory or primary residence.
…but you might want to check it again
Apparently, people can turn 1031 exchange property into their personal or primary residence. Even more, you might not use your home for such a transaction, you can use personal properties like business assets and heavy equipment. In some special cases, a 1031 exchange can involve your personal residence. Yes, now you are confused because you just read above that primary residence does not qualify for such a tax-deferring method but think about it: if you and your spouse bought and lived in a house for approximately two years, but you decided to move out at some point and use the residence for rental, this might change the situation. The reason is more than simple; you now own a rental property in which other people have lived for several years so if you decide to sell it, you might be able to enjoy the benefits of a 1031 exchange.