Category: 1031 Exchange General

What is an IRA?
IRA stands for Individual Retirement Arrangement, and Investors may make contributions to their Individual Retirement Accounts. According to the Internal Revenue Service, a traditional IRA is a tax-advantaged personal savings plan where contributions may be tax deductible. They use the word “may” because there are annual contribution limits based on age and income, and whether the investor is covered by a retirement plan at work. For 2023, the annual contribution limit is $6,500, or $7,500 if the investor is age 50 or older.
Contributions made to an IRA within the IRS limits are tax deductible, and any interest or growth on those investments is tax deferred. Withdrawals made before age 59-½ are subject to penalties, and investors must start making withdrawals when they reach age 73. When the investor starts making withdrawals, those withdrawals are taxed as ordinary income.
IRAs are held by a custodian, such as banks, brokerages, or other financial institutions, many of which have recognizable names, including our affiliate, https://inspirafinancial.com/”>Inspira Financial. There are many kinds of assets an investor may hold in their IRA (subject to several prohibitions, including collectibles and insurance policies). However, the largest brokerages and financial institutions tend to limit investments to stocks, bonds, and mutual funds. (Self-Directed IRA (“SDIRA”) is an IRA held by a custodian that allows for investment in a broader range of assets than other IRA custodians. These “alternative assets” may include real estate, precious metals and other commodities, tax lien certificates, and others. Additionally, while the custodian administers the account, it is directly managed by the investor, which is why it is called self-directed. As with traditional IRAs, SDIRA contributions and transactions are tax deductible.
Among the more common investments in SDIRAs is investment in real estate. These investments can be in the form of single-family, multi-family, commercial, industrial, office, improved or unimproved land, or virtually any other interest in investment real estate. Foreign real estate is also permitted.
When owning real estate inside of an SDIRA, all income from the real estate belongs to the SDIRA, not to the investor. Thus, the investor cannot use any rental income from the real estate to cover personal living expenses. Additionally, when selling real estate that is owned by the SDIRA, all profits or losses belong to the SDIRA and continue to grow tax deferred. If the investor chooses to reinvest in more real estate, there are no timing restrictions, and proceeds may be held in the SDIRA until they are deployed toward the acquisition of a new asset. There are prohibitions on “self-dealing” that are essentially the same as the related party rules in a Section 1031 exchange. This rule also prohibits investors from making any personal use of an SDIRA asset.
Section 1031 Exchanges Compared to SDIRAs
Section 1031 of the Internal Revenue Code allows an owner of business or investment real estate to sell old property (Relinquished Property) and acquire new property (Replacement Property) without paying any taxes on the profit (capital gains) of the sale of the old property. The principle underlying these “tax-deferred exchanges” is that by using the exchange value from one property to buy another—instead of receiving cash for that exchange value—the property owner is simply continuing the investment from the original property into the new property. As such, the IRS will not recognize the sale as a taxable event, provided that the owner (referred to in this article as the “taxpayer” or “exchanger”) adheres to the many rules governing exchanges.
As with the SDIRA, in a 1031 Exchange, real estate can be any asset class – single-family, multi-family, commercial, industrial, raw land, etc. Section 1031 rules require that both the Relinquished and Replacement Properties be “held for productive use in a trade or business or for investment”. This is similar to the prohibition on self-dealing discussed above. Moreover, Section 1031 provides for a deferral of the state and federal capital gains and depreciation recapture taxes, as well as the net investment income tax, if applicable much like the SDIRA. But the similarities largely fade after this point.
SDIRA and 1031 Exchange Differences
First, there are no limits to the amount of money that can be invested using Section 1031. Further, while rental income from SDIRA property must stay within the SDIRA, any income generated from a Section 1031 exchange property can be used by the taxpayer to pay their own personal expenses, or however they wish. Another unique requirement for a valid 1031 exchange is that upon the sale of the Relinquished Property, the proceeds must be held by a Qualified Intermediary, and the taxpayer must avoid even “constructive receipt” of the exchange funds. Lastly, there are strict time limits imposed on Section 1031 exchange transactions, including the 45-day Identification Period and the 180-day Exchange period.
Starting with the date of sale of the Relinquished Property, the taxpayer must identify a short list of potential Replacement Properties within 45 days following one of the identification rules and the taxpayer must complete the acquisition of one or more of those identified properties within 180 days (or the due date of the taxpayer’s tax return for the year that the exchange commenced).
And while foreign real estate may be part of the taxpayer’s portfolio, foreign real estate is not like-kind to domestic real estate, and they cannot be part of the same 1031 Exchange transaction.
Consult with a Professional
Since owning investment real estate inside an SDIRA is already a tax-deferred situation, the use of Section 1031 on the sale of SDIRA real estate is not necessary. But many investors who hold real estate inside an SDIRA also hold investment real estate directly, outside of their SDIRA. Owning investment real estate in an SDIRA, or outside of the SDIRA, each have merits and pitfalls. Each can be part of a successful real estate investment strategy, independently, or together. This article is not intended to be an exhaustive dissertation on the uses of these two investment strategies, but rather a conversation starter. Investors are encouraged to discuss their unique situations with their financial planner, attorney, and accountant, as well as a 1031 exchange representative at Accruit.
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.

What is an IRA?
IRA stands for Individual Retirement Arrangement, and Investors may make contributions to their Individual Retirement Accounts. According to the Internal Revenue Service, a traditional IRA is a tax-advantaged personal savings plan where contributions may be tax deductible. They use the word “may” because there are annual contribution limits based on age and income, and whether the investor is covered by a retirement plan at work. For 2023, the annual contribution limit is $6,500, or $7,500 if the investor is age 50 or older.
Contributions made to an IRA within the IRS limits are tax deductible, and any interest or growth on those investments is tax deferred. Withdrawals made before age 59-½ are subject to penalties, and investors must start making withdrawals when they reach age 73. When the investor starts making withdrawals, those withdrawals are taxed as ordinary income.
IRAs are held by a custodian, such as banks, brokerages, or other financial institutions, many of which have recognizable names, including our affiliate, https://inspirafinancial.com/”>Inspira Financial. There are many kinds of assets an investor may hold in their IRA (subject to several prohibitions, including collectibles and insurance policies). However, the largest brokerages and financial institutions tend to limit investments to stocks, bonds, and mutual funds. (Self-Directed IRA (“SDIRA”) is an IRA held by a custodian that allows for investment in a broader range of assets than other IRA custodians. These “alternative assets” may include real estate, precious metals and other commodities, tax lien certificates, and others. Additionally, while the custodian administers the account, it is directly managed by the investor, which is why it is called self-directed. As with traditional IRAs, SDIRA contributions and transactions are tax deductible.
Among the more common investments in SDIRAs is investment in real estate. These investments can be in the form of single-family, multi-family, commercial, industrial, office, improved or unimproved land, or virtually any other interest in investment real estate. Foreign real estate is also permitted.
When owning real estate inside of an SDIRA, all income from the real estate belongs to the SDIRA, not to the investor. Thus, the investor cannot use any rental income from the real estate to cover personal living expenses. Additionally, when selling real estate that is owned by the SDIRA, all profits or losses belong to the SDIRA and continue to grow tax deferred. If the investor chooses to reinvest in more real estate, there are no timing restrictions, and proceeds may be held in the SDIRA until they are deployed toward the acquisition of a new asset. There are prohibitions on “self-dealing” that are essentially the same as the related party rules in a Section 1031 exchange. This rule also prohibits investors from making any personal use of an SDIRA asset.
Section 1031 Exchanges Compared to SDIRAs
Section 1031 of the Internal Revenue Code allows an owner of business or investment real estate to sell old property (Relinquished Property) and acquire new property (Replacement Property) without paying any taxes on the profit (capital gains) of the sale of the old property. The principle underlying these “tax-deferred exchanges” is that by using the exchange value from one property to buy another—instead of receiving cash for that exchange value—the property owner is simply continuing the investment from the original property into the new property. As such, the IRS will not recognize the sale as a taxable event, provided that the owner (referred to in this article as the “taxpayer” or “exchanger”) adheres to the many rules governing exchanges.
As with the SDIRA, in a 1031 Exchange, real estate can be any asset class – single-family, multi-family, commercial, industrial, raw land, etc. Section 1031 rules require that both the Relinquished and Replacement Properties be “held for productive use in a trade or business or for investment”. This is similar to the prohibition on self-dealing discussed above. Moreover, Section 1031 provides for a deferral of the state and federal capital gains and depreciation recapture taxes, as well as the net investment income tax, if applicable much like the SDIRA. But the similarities largely fade after this point.
SDIRA and 1031 Exchange Differences
First, there are no limits to the amount of money that can be invested using Section 1031. Further, while rental income from SDIRA property must stay within the SDIRA, any income generated from a Section 1031 exchange property can be used by the taxpayer to pay their own personal expenses, or however they wish. Another unique requirement for a valid 1031 exchange is that upon the sale of the Relinquished Property, the proceeds must be held by a Qualified Intermediary, and the taxpayer must avoid even “constructive receipt” of the exchange funds. Lastly, there are strict time limits imposed on Section 1031 exchange transactions, including the 45-day Identification Period and the 180-day Exchange period.
Starting with the date of sale of the Relinquished Property, the taxpayer must identify a short list of potential Replacement Properties within 45 days following one of the identification rules and the taxpayer must complete the acquisition of one or more of those identified properties within 180 days (or the due date of the taxpayer’s tax return for the year that the exchange commenced).
And while foreign real estate may be part of the taxpayer’s portfolio, foreign real estate is not like-kind to domestic real estate, and they cannot be part of the same 1031 Exchange transaction.
Consult with a Professional
Since owning investment real estate inside an SDIRA is already a tax-deferred situation, the use of Section 1031 on the sale of SDIRA real estate is not necessary. But many investors who hold real estate inside an SDIRA also hold investment real estate directly, outside of their SDIRA. Owning investment real estate in an SDIRA, or outside of the SDIRA, each have merits and pitfalls. Each can be part of a successful real estate investment strategy, independently, or together. This article is not intended to be an exhaustive dissertation on the uses of these two investment strategies, but rather a conversation starter. Investors are encouraged to discuss their unique situations with their financial planner, attorney, and accountant, as well as a 1031 exchange representative at Accruit.
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.

One of the most critical aspects of a Section 1031 is the idea that the properties involved must be “like-kind” to one another. This gives rise to a common misconception that “since I sold a single-family rental, I must buy a single-family rental.” The IRS clarified this issue in 2002 when it issued Revenue Procedure 2002-22.
At its core, Revenue Procedure 2002-22 authorized the acquisition of a Tenants in Common (“TIC”) interest in real estate as Replacement Property for other interests in real estate. In short, a TIC is a form of real estate ownership where two or more people each own undivided interests in the entire property. For a tenants in common ownership structure to be valid, and not construed as a partnership, several factors will be considered, including:
(i) the existence of a written tenants in common agreement among the co-owners;
(ii) the co-owners do not hold themselves out as a partnership by filing a partnership return, trading under a business name, or otherwise; and
(iii) their voting rights, rights to profits and losses, and other rights and responsibilities must be proportional to their respective investments in the property.
Where an investor wishes to acquire a TIC interest as Replacement Property in a 1031 Exchange, the identification of that TIC interest should be precise and explicit. It is not enough to identify “a TIC interest in 214 E. Second Street, Ottumwa, Iowa.” Rather, the identification should specify the fraction or percentage interest to be acquired, such as “an undivided one-half interest in 214 E. Second Street, Ottumwa, Iowa” or perhaps “an undivided 14.5 percent interest in 105 E Third Street, Ottumwa, Iowa.”
The use of the TIC ownership structure allows multiple investors to pool their resources to acquire a larger or more expensive property than they could otherwise acquire individually. And not everyone investing in the TIC property must be participating in a 1031 Exchange. For example, Rosa just sold a $125,000 investment property as part of a properly structured 1031 Exchange. She has found a great property in which to reinvest, but at $1.1M, it is too expensive for her. Rosa invites several of her friends to reinvest with her, each contributing various amounts to the purchase. Rosa will identify and acquire an undivided 11.36 percent interest in the property, with her friends acquiring the remaining portion of the property.

One of the most critical aspects of a Section 1031 is the idea that the properties involved must be “like-kind” to one another. This gives rise to a common misconception that “since I sold a single-family rental, I must buy a single-family rental.” The IRS clarified this issue in 2002 when it issued Revenue Procedure 2002-22.
At its core, Revenue Procedure 2002-22 authorized the acquisition of a Tenants in Common (“TIC”) interest in real estate as Replacement Property for other interests in real estate. In short, a TIC is a form of real estate ownership where two or more people each own undivided interests in the entire property. For a tenants in common ownership structure to be valid, and not construed as a partnership, several factors will be considered, including:
(i) the existence of a written tenants in common agreement among the co-owners;
(ii) the co-owners do not hold themselves out as a partnership by filing a partnership return, trading under a business name, or otherwise; and
(iii) their voting rights, rights to profits and losses, and other rights and responsibilities must be proportional to their respective investments in the property.
Where an investor wishes to acquire a TIC interest as Replacement Property in a 1031 Exchange, the identification of that TIC interest should be precise and explicit. It is not enough to identify “a TIC interest in 214 E. Second Street, Ottumwa, Iowa.” Rather, the identification should specify the fraction or percentage interest to be acquired, such as “an undivided one-half interest in 214 E. Second Street, Ottumwa, Iowa” or perhaps “an undivided 14.5 percent interest in 105 E Third Street, Ottumwa, Iowa.”
The use of the TIC ownership structure allows multiple investors to pool their resources to acquire a larger or more expensive property than they could otherwise acquire individually. And not everyone investing in the TIC property must be participating in a 1031 Exchange. For example, Rosa just sold a $125,000 investment property as part of a properly structured 1031 Exchange. She has found a great property in which to reinvest, but at $1.1M, it is too expensive for her. Rosa invites several of her friends to reinvest with her, each contributing various amounts to the purchase. Rosa will identify and acquire an undivided 11.36 percent interest in the property, with her friends acquiring the remaining portion of the property.

One of the most critical aspects of a Section 1031 is the idea that the properties involved must be “like-kind” to one another. This gives rise to a common misconception that “since I sold a single-family rental, I must buy a single-family rental.” The IRS clarified this issue in 2002 when it issued Revenue Procedure 2002-22.
At its core, Revenue Procedure 2002-22 authorized the acquisition of a Tenants in Common (“TIC”) interest in real estate as Replacement Property for other interests in real estate. In short, a TIC is a form of real estate ownership where two or more people each own undivided interests in the entire property. For a tenants in common ownership structure to be valid, and not construed as a partnership, several factors will be considered, including:
(i) the existence of a written tenants in common agreement among the co-owners;
(ii) the co-owners do not hold themselves out as a partnership by filing a partnership return, trading under a business name, or otherwise; and
(iii) their voting rights, rights to profits and losses, and other rights and responsibilities must be proportional to their respective investments in the property.
Where an investor wishes to acquire a TIC interest as Replacement Property in a 1031 Exchange, the identification of that TIC interest should be precise and explicit. It is not enough to identify “a TIC interest in 214 E. Second Street, Ottumwa, Iowa.” Rather, the identification should specify the fraction or percentage interest to be acquired, such as “an undivided one-half interest in 214 E. Second Street, Ottumwa, Iowa” or perhaps “an undivided 14.5 percent interest in 105 E Third Street, Ottumwa, Iowa.”
The use of the TIC ownership structure allows multiple investors to pool their resources to acquire a larger or more expensive property than they could otherwise acquire individually. And not everyone investing in the TIC property must be participating in a 1031 Exchange. For example, Rosa just sold a $125,000 investment property as part of a properly structured 1031 Exchange. She has found a great property in which to reinvest, but at $1.1M, it is too expensive for her. Rosa invites several of her friends to reinvest with her, each contributing various amounts to the purchase. Rosa will identify and acquire an undivided 11.36 percent interest in the property, with her friends acquiring the remaining portion of the property.

One requirement of tax-deferred exchanges of property has always been that the property acquired, the Replacement Property, be of a “like-kind” to the property sold, the Relinquished Property, even as far back as 1921 when IRC Section 1031 was added to the tax code. The basis for this requirement is the “continuity of investment” doctrine, which reasons that where a taxpayer is merely continuing its investment from one property into a similar kind of property without receiving any cash profit from the sale, no tax should be triggered. Of course, this tax liability is only deferred, not eliminated. So, given that it is such an essential element of any tax-deferred exchange, what exactly does “like-kind” mean?
Fortunately, in the context of real property, the analysis is simple. For 1031 exchange purposes, all real property is generally “like-kind” to all other real property, and, despite many misconceptions out there about the nature of this requirement, the asset class or specific type of property is irrelevant. In other words, if a taxpayer is selling an apartment building, she does not have to acquire another apartment building. Rather, she can acquire any other type of real estate as replacement property, like raw land, an office building, an interest in a Delaware Statutory Trust, etc., provided that the replacement property is considered real property under applicable rules and that she intends to hold it for a qualified purpose, i.e.business or investment use, and properly identified within the 45-day identification period. (Note: the “like-kind” analysis was not always so simple in the personal property context (i.e. anything that isn’t real property), but in 2018 the Tax Cuts and Jobs Act amended the law and personal property exchanges are no longer eligible for tax deferral under Section 1031).
This begs the obvious question: what is “real property” for purposes of Section 1031?
Examples of Real Estate Interests that are Like-Kind
Most real property consists of a piece of land with or without a structure on it. It doesn’t matter what type of structure, they are all like-kind. Even vacant land can be held for rental or simply held for appreciation. Real estate does not have to be rental in nature to qualify. There are also many other types of real estate interests that might not readily come to mind but are considered like-kind to any other real property interest. Below is a list of some of them:

Single or multi-family rental properties
Office buildings
Apartment buildings
Shopping centers
Warehouses
Industrial property
Farm and ranch land
Vacant land held for appreciation in value
Cooperative apartments (Co-ops)
Delaware Statutory Trusts (DSTs)
Hotels and motels
Cell tower and billboard easements
Conservation easements
Lessee’s interest in a 30-year lease (NOT a lessor’s interest)
Warehouses
Interests in a Contract for Deed
Land trusts
Growing crops
Mineral, oil, and gas rights
Water and timber rights
Wind farms
Solar arrays

Inclusion of other types of property as Real Property
In December 2020, the IRS issued new regulations that further defined real property in the Code of Federal Regulations. It did not change the fact that all real estate is like-kind to all other real estate. Rather, it provided additional clarification as to certain types of “inherently permanent structures” and “structural components” of those inherently permanent structures are considered part of the real estate, and thus eligible for exchange treatment.
By way of example, some “inherently permanent structures” that are considered real property and thus exchangeable are:
Other inherently permanent structures. Inherently permanent structures under paragraph (a)(2)(ii) of this section include the following distinct assets, if permanently affixed: In-ground swimming pools; roads; bridges; tunnels; paved parking areas, parking facilities, and other pavements; special foundations; stationary wharves and docks; fences; inherently permanent advertising displays for which an election under section 1033(g)(3) is in effect; inherently permanent outdoor lighting facilities; railroad tracks and signals; telephone poles; power generation and transmission facilities; permanently installed telecommunications cables; microwave transmission, cell, broadcasting, and electric transmission towers; oil and gas pipelines; offshore platforms, derricks, oil and gas storage tanks; and grain storage bins and silos . . . . See 26 CFR §1.1031(a)-3(a)(2)(ii)(C).
As for “structural components” that are likely to qualify as real property, the following examples appear in the regulations:
Walls; partitions; doors; wiring; plumbing systems; central air conditioning and heating systems; pipes and ducts; elevators and escalators; floors; ceilings; permanent coverings of walls, floors, and ceilings; insulation; chimneys; fire suppression systems, including sprinkler systems and fire alarms; fire escapes; security systems; humidity control systems; and other similar property . . . . See 26 CFR §1.1031(a)-3(a)(2)(iii)(B)
There is a lot more detail in these regulations and although this may seem like a lot of minutiae, but these assets, where present, can sometimes have a significant effect on transaction value which can also be included as part of the real estate for §1031 exchange purposes. In any event, taxpayers now have the benefit of additional IRS guidance that clarifies the components of real property, or other interests related to real property, that qualify for exchange treatment.
Foreign Real Estate Is Not Considered Like-Kind
Section 1031(h) of the Tax Code provides that real estate located within the United States and real estate located outside of the United States are not considered like-kind. With some limited exceptions, most U.S. territories are not considered property in the U.S. United States taxpayers who wish to trade foreign property for foreign property may do so and it is considered like-kind and can receive §1031 exchange treatment.
For all exchanges, in addition to meeting the like-kind requirements above, potential replacement property needs to be formally identified within 45 days of the sale of relinquished property and an identified property has to be acquired within 180 days of the sale. As referenced above, Section 1031(a) provides that property received by a taxpayer that was not identified or received within these timeframes is not considered like-kind.
Many people, and in some cases, even professional advisers, think that the like-kind requirement means that the taxpayer must trade into the same kind of property she has sold. Since the basis for Section 1031 tax deferral has always been continuity of investment, a consequence of that concept is that the properties had to be the same nature or character, i.e., like-kind. During most of the period when Section 1031 has been part of the Tax Code, exchanges could be done for assets including personal property, intangible property, and real estate. All those asset types were subject to the like-kind requirement and like-kind meant something different for each of them.
As of 2018, only real estate can be exchanged under Section 1031, and essentially the determination of what kind of real estate was like-kind to other type of real estate has been unchanged. All real estate is like-kind to other types of real estate.

One requirement of tax-deferred exchanges of property has always been that the property acquired, the Replacement Property, be of a “like-kind” to the property sold, the Relinquished Property, even as far back as 1921 when IRC Section 1031 was added to the tax code. The basis for this requirement is the “continuity of investment” doctrine, which reasons that where a taxpayer is merely continuing its investment from one property into a similar kind of property without receiving any cash profit from the sale, no tax should be triggered. Of course, this tax liability is only deferred, not eliminated. So, given that it is such an essential element of any tax-deferred exchange, what exactly does “like-kind” mean?
Fortunately, in the context of real property, the analysis is simple. For 1031 exchange purposes, all real property is generally “like-kind” to all other real property, and, despite many misconceptions out there about the nature of this requirement, the asset class or specific type of property is irrelevant. In other words, if a taxpayer is selling an apartment building, she does not have to acquire another apartment building. Rather, she can acquire any other type of real estate as replacement property, like raw land, an office building, an interest in a Delaware Statutory Trust, etc., provided that the replacement property is considered real property under applicable rules and that she intends to hold it for a qualified purpose, i.e.business or investment use, and properly identified within the 45-day identification period. (Note: the “like-kind” analysis was not always so simple in the personal property context (i.e. anything that isn’t real property), but in 2018 the Tax Cuts and Jobs Act amended the law and personal property exchanges are no longer eligible for tax deferral under Section 1031).
This begs the obvious question: what is “real property” for purposes of Section 1031?
Examples of Real Estate Interests that are Like-Kind
Most real property consists of a piece of land with or without a structure on it. It doesn’t matter what type of structure, they are all like-kind. Even vacant land can be held for rental or simply held for appreciation. Real estate does not have to be rental in nature to qualify. There are also many other types of real estate interests that might not readily come to mind but are considered like-kind to any other real property interest. Below is a list of some of them:

Single or multi-family rental properties
Office buildings
Apartment buildings
Shopping centers
Warehouses
Industrial property
Farm and ranch land
Vacant land held for appreciation in value
Cooperative apartments (Co-ops)
Delaware Statutory Trusts (DSTs)
Hotels and motels
Cell tower and billboard easements
Conservation easements
Lessee’s interest in a 30-year lease (NOT a lessor’s interest)
Warehouses
Interests in a Contract for Deed
Land trusts
Growing crops
Mineral, oil, and gas rights
Water and timber rights
Wind farms
Solar arrays

Inclusion of other types of property as Real Property
In December 2020, the IRS issued new regulations that further defined real property in the Code of Federal Regulations. It did not change the fact that all real estate is like-kind to all other real estate. Rather, it provided additional clarification as to certain types of “inherently permanent structures” and “structural components” of those inherently permanent structures are considered part of the real estate, and thus eligible for exchange treatment.
By way of example, some “inherently permanent structures” that are considered real property and thus exchangeable are:
Other inherently permanent structures. Inherently permanent structures under paragraph (a)(2)(ii) of this section include the following distinct assets, if permanently affixed: In-ground swimming pools; roads; bridges; tunnels; paved parking areas, parking facilities, and other pavements; special foundations; stationary wharves and docks; fences; inherently permanent advertising displays for which an election under section 1033(g)(3) is in effect; inherently permanent outdoor lighting facilities; railroad tracks and signals; telephone poles; power generation and transmission facilities; permanently installed telecommunications cables; microwave transmission, cell, broadcasting, and electric transmission towers; oil and gas pipelines; offshore platforms, derricks, oil and gas storage tanks; and grain storage bins and silos . . . . See 26 CFR §1.1031(a)-3(a)(2)(ii)(C).
As for “structural components” that are likely to qualify as real property, the following examples appear in the regulations:
Walls; partitions; doors; wiring; plumbing systems; central air conditioning and heating systems; pipes and ducts; elevators and escalators; floors; ceilings; permanent coverings of walls, floors, and ceilings; insulation; chimneys; fire suppression systems, including sprinkler systems and fire alarms; fire escapes; security systems; humidity control systems; and other similar property . . . . See 26 CFR §1.1031(a)-3(a)(2)(iii)(B)
There is a lot more detail in these regulations and although this may seem like a lot of minutiae, but these assets, where present, can sometimes have a significant effect on transaction value which can also be included as part of the real estate for §1031 exchange purposes. In any event, taxpayers now have the benefit of additional IRS guidance that clarifies the components of real property, or other interests related to real property, that qualify for exchange treatment.
Foreign Real Estate Is Not Considered Like-Kind
Section 1031(h) of the Tax Code provides that real estate located within the United States and real estate located outside of the United States are not considered like-kind. With some limited exceptions, most U.S. territories are not considered property in the U.S. United States taxpayers who wish to trade foreign property for foreign property may do so and it is considered like-kind and can receive §1031 exchange treatment.
For all exchanges, in addition to meeting the like-kind requirements above, potential replacement property needs to be formally identified within 45 days of the sale of relinquished property and an identified property has to be acquired within 180 days of the sale. As referenced above, Section 1031(a) provides that property received by a taxpayer that was not identified or received within these timeframes is not considered like-kind.
Many people, and in some cases, even professional advisers, think that the like-kind requirement means that the taxpayer must trade into the same kind of property she has sold. Since the basis for Section 1031 tax deferral has always been continuity of investment, a consequence of that concept is that the properties had to be the same nature or character, i.e., like-kind. During most of the period when Section 1031 has been part of the Tax Code, exchanges could be done for assets including personal property, intangible property, and real estate. All those asset types were subject to the like-kind requirement and like-kind meant something different for each of them.
As of 2018, only real estate can be exchanged under Section 1031, and essentially the determination of what kind of real estate was like-kind to other type of real estate has been unchanged. All real estate is like-kind to other types of real estate.