Does My Property Qualify

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.

Qualifying Property

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.

Properties with 1250 and 1245 Improvements: 1250 Property is not Like-Kind to 1245 Property.   Confused?   Many agriculture enterprises have both, largely due to bonus depreciation on some improvements.  Distinctly, 1250 improvements sold after utilizing straight line depreciation are typically taxed at a 25% recapture rate and 1245 properties would likely be recaptured at the ordinary tax rate.   Because they are not like kind, 1245 real property can only be exchanged for other 1245 property.  This is an important distinction should your property have both.  You must consult with your tax advisors to sort this out and establish what you are selling and what you intend to buy.

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.