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What type of real estate does NOT qualify for 1031 exchange?

April 3, 2021 by Exchange Hub
The 1031 exchange is a powerful tool for real estate investors, but did you know in the past it has applied to other things such as equipment, aircraft, and even cattle? Right now, most investors focus on exchanging real estate for real estate. Bit there are some situations where real estate can NOT be exchanged. Let’s take a look at some of these special situations.

Property held primarily for sale and stock in trade: This has 2 parts. The first states that property held primarily for sale cannot be considered exchange property. This means if you buy real estate with the sole purpose of selling it, typically within 2 tax years, it cannot be exchanged. Second is similar and states that if you buy and sell property as part of your day to day business activities, it cannot be considered exchange property.

Bonds, stocks, and notes: These are not considered real estate and cannot be exchanged.

Interests in a partnership: If you own share of a partnership, or LLC that owns real estate the you can perform an exchange at the entity level, but if you sell units or shares of your entity it is not exchangeable.

Certificates of trust or beneficial interests: Similar to a partnership, or LLC that owns real estate the you can perform an exchange at the trust level, but if you sell units or shares of your trust it is not exchangeable. Unless the trust is a properly structured Delaware Statutory Trust, which does qualify as real property and can be exchanged.

Choses in action: A chose in action is a right to recover or receive money or other consideration or property, but a chose in action is not considered property in itself.

Other securities of interest or indebtedness: This one is tricky, because this category became obsolete after the 1984 amendment excluding partnerships interests from 1031 exchange tax deferral. But the IRS states this none the less.

These are just some of the pitfalls that can trap an investor who is attempting to complete an exchange. For help deciding whether or not your property is exchangeable call one of our 1031 specialists today!
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