When Does A Property Qualify For a 1031 Exchange?

If you’re considering a 1031 exchange it’s important to know if your investment real estate is eligible.

A 1031 exchange gives investors a way to defer paying tax on gain from the sale of investment real estate. This means that primary residences do not qualify for a 1031 exchange. A 1031 exchange is solely for real estate held for productive use in business, trade or for investment.

House flipping is also off limits. Section 1031 states that a property “held primarily for resale” does not qualify. This excludes fix and flips.

The good news is that like-kind, as defined by the IRS statute, allows for any type of investment real estate to be exchanged for any other kind of investment real estate. This means that if you’re selling a rental condo and want to use the proceeds of that sale to purchase a retail building, you are free to do so.

The power of a 1031 to shape your real estate investment portfolio using your own tax dollars is limited only by your creativity and desired outcome.

Can You Take Money Out Of A 1031 Exchange?

If you’re willing to incur some tax, you may purchase less than your net sale under IRS Section 1031.

And, you may take cash out without jeopardizing the entirety of your 1031 exchange.

However, if you want to purchase less than what you sold or take some cash out, then the IRS will call that “booty” and tax it as profit. The IRS is willing to leave its tax in the game, but they are expecting you to leave your profit in the game as well. So, there’s no taking your “booty” and buying an island without paying at least some tax.

The IRS considers this taxable because their interpretation is that the first dollar you take out is going to be a dollar of profit.