Not many things in the IRS tax code ever seem easy. However, this little-known investment tool might be just the vehicle you are looking for. Ten-thirty-one (1031) exchanges are straightforward, provided you follow a few rules and don’t use outdated 1031 exchange information – the IRS made significant changes to what qualifies for a 1031 exchange. We’ll get to what those changes are and how to spot other websites that don’t have up-to-date information as we dive into who is eligible for a 1031 exchange in New Jersey.
What is a 1031 Exchange
A 1031 exchange is a tax-advantaged investment vehicle that lets you defer taxes on a property sale for yourself or those inheriting the property upon your death. While you can’t put your primary dwelling (your home) into a 1031 exchange, you’ll see the types of real property that qualify below. Once in the exchange, you may swap out or exchange the property for a like kind and defer taxes until you are no longer using the vehicle for your investments.
What is Eligible
Any investment property qualifies—apartment buildings, second homes, bare land, etc. As long as it is real estate that is not your primary dwelling, the property generally qualifies. The best thing that you can do is to understand the rules of a 1031 exchange so you get the most out of it.
Real property is eligible for a 1031 exchange. Here are some examples of suitable real property:
- Raw land or farmland for improved real estate
- Residential, commercial, industrial or retail rental properties for any other real estate
- Condos, townhomes, and apartment buildings.
You are not eligible for a 1031 exchange if it isn’t considered real estate. Here are some specific examples of property that won’t qualify:
- Stocks, bonds, or notes
- Interests in a partnership
- Foreign real property for U.S. real property.
Of course, don’t hesitate to reach out if you want help determining what would be eligible.
Who is Eligible
It’s possible that you may have important questions about a 1031 exchange. An easy way to determine eligibility is to consider the types of entities that can own real property. Here are a few examples of the entities that can participate in a 1031 exchange:
- Partnerships (general or limited)
What out-of-date Information should I be on the lookout for?
According to the IRS, as of January 1, 2018, exchanges of machinery, equipment, vehicles, artwork, collectibles, patents, and other intellectual property and intangible business assets generally do not qualify for non-recognition of gain or loss as like-kind exchanges. 1031 Exchanges didn’t always require real property. People could use artwork, investments, and various assets that were not real property.
That paragraph is easy enough to spot on the IRS website under 1031 exchanges. Unfortunately, you will still find many websites providing this poor out-of-date advice that will likely get you in tax trouble. So, investor, BEWARE! Make sure you have the right professionals to step you through the process. The tax savings are more than worth it if you do it correctly.
Cortes & Hay have been helping people correctly invest in 1031 exchanges for as long as they have existed. We have been offering 1031 services through several rule changes and would be happy to discuss what those changes were. Get in touch with us today to answer any questions about what a 1031 exchange can do for you and how we can help you manage it.