Like Kind Exchange – Asset Class, Part 3

The questions here were received from interested 1031 exchangers visiting my website. I have chosen to leave the questions intact with their ambiguity, shorthand writing and misspellings so as not to act on the assumption as to what when unclear the questioner meant.

Like Kind Exchange – Asset Class, Part 3

Many people who are hearing about a 1031 exchange for the first time wonder about what “like kind property” means. It generally refers to two different properties that are a similar type of property. But it sometimes gets pretty complicated.

For instance, before a revenue ruling in 1991, a particular client paid a real estate attorney over $100,000 in research costs and representation to declare a particular property “like kind”. After the IRS 1992 ruling defining “like kind” as exchange of real property held for productive use in a trade or business or for investment. After that broad definition, the revenue ruling meant that clients no longer pay those legal fees for determining like kind. Most CPAs are now knowledgeable.

Anyway, like kind is critically important to a 1031 exchange deal.

Question 1:
Can I use the money of sale of rental property to pay loan on other rental property and use 1031 exchange?\nCan I use the money from stock sale to exchange to real estate?

Unfortunately, you cannot use exchange funds to pay down the loan on a property. You also can’t use money from the sale of stocks for real estate. A deed and a lien on the property do not represent like kind, and neither do equities and real estate funds.

Question 2:
After selling a vacant lot, can we buy a condo or single residential home?

Since both the vacant lot and the condo or single-family home are ‘real property,’ YES you can.

Question 3:
Will the following 1031 exchange be judged as “Like Kind”? Day Care business (w/bldg and property valued for $2,000,000). For a home remodeling business (w/ a bldg and property valued at $1,300,000).

In your example, the building and property both qualify for like kind – your boot will be $700,000, and you pay taxes on that – you may also need a separate business contract for the day care operational items.

About Marilee:
Role of Marilee Hill, Registered Representative (RR)

Marilee Hill has 20 years of experience in real estate, and is a FINRA licensed professional who knows the 1031 exchange field well. Since dealing with her own multi-million dollar properties and helping clients to look at risk management with these kinds of deals, Hill has done a lot of work in this area, and understands the process and how it affects various stakeholders. Get help from a professional who understands the 1031 exchange system.

1031 Exchange