Things to Consider when Planning to Exchange Property Under Section 1031

There are several important things that one should keep in mind when taking advantage of the tax-deferred 1031 property exchange. First, it should be clear that under Section 1031, the provision is only applicable to properties that are in use for investment and business purposes only. This means that one's residence cannot be swapped for a new dwelling.

When it comes to vacation homes and other secondary types of residences, the drawing line is less clear. 1031 may be utilized in these exchanges, although rules set by Congress since 2004 had tightened restrictions on this matter, especially if one decides to re-purpose the new property into a house for rent. For specifics, consult an industry professional.

The provision states that exchanges must be of the same type, but it doesn't have to be the exact same type when it comes to real property. A piece of real estate, for example, can be exchanged with another type of property, whether it's an empty lot or an apartment unit. This does not extend to personal property, where rules are stricter. A car cannot be exchanged with a truck, for example.

Furthermore, several types of what can be ascribed to being a property, are not eligible for exchange under the 1031 provision. This include inventory or stocks in trade, bonds, notes, securities and debt. Likewise, partnership interests or certificates of trust are not exchangeable under 1031.