Does My Property Qualify
This are is certainly one in which the “devil is in the details. Whether or not a property qualifies depends upon the facts of each transaction. For best results, always plan ahead and consult with a knowledgeable attorney, CPA, or knowledgeable tax adviser.
Real Property: If held as an investment or used in a business or trade, real property will generally qualify regardless of type. This includes farm and ranch land, rent houses, apartment buildings, vacation houses primarily held for rental, vacant land, perpetual easements, perpetual water rights (most states), long term leases (>30 years), mineral rights, and oil & gas interests. This is not a complete list. Real properties that do not qualify are those purchased for personal use (residence or vacation) and property purchased for resale.
Personal Property: The most common personal property exchanges include auto fleets, construction and agriculture equipment, computers, office furniture. Less common items are collectables such as art, gold and silver, livestock, wildlife and collectable autos. While real property is like kind to almost all other real property, “like-kind” rules for personal property are much more restricted. For instance, a sedan is not like kind to a pickup truck, gold bullion is not like kind to gold coins, and a bull is not like kind to a cow!
In both cases, property located outside the United States is not like-kind to property located within the United States.
How long do I have to own the property before it qualifies?
This answer can be simple or complex depending upon the situation. Other than related party exchanges, there are generally no defined holding periods for property. At the time of purchase, the intent must be to hold the property as an investment or use in a business. It is assumed that as long as credible intent to hold was demonstrated, an unsolicited offer does not preclude the owner from selling the property as part of a 1031 exchange even if the time lapse was relatively short. Obviously, the longer the property is held and as long as business or investment use is demonstrated, the more secure the exchange should be.
How do I qualify a second dwelling or vacation home?
This is that exception to the “general” holding period rule, at least under Safe-Harbor guidelines. Under IRC 2008-16, the service created a set of guidelines that when followed, allowed the taxpayer to exchange minimal use second dwellings even if the taxpayer personally used the property periodically. These guidelines are fairly restrictive as to personal use in the previous two 12 month periods before sale or the two 12 month periods following purchase. In short, the taxpayer or related parties cannot use the property for more than 14 days per 12 month period or 10% of the total rental days, whichever is greater. The taxpayer is also allowed maintenance days.
In addition, the taxpayer must have rented the property to unrelated parties for at least 14 days of each twelve month period. For vacation properties that have fallen into disuse, advanced planning can foster a good exchange and create opportunities for reinvestment otherwise lost.