Exchange Basics
Qualified Property
To meet the requirements of §1031, both Relinquished Property and Replacement Property must qualify. In other words, both the property you are selling and the property you are buying must be qualified property of like-kind. If not, your exchange will fail and be classified as a sale. This is so important, that it bears repeating:
TO QUALIFY AS A LIKE-KIND EXCHANGE, THE PROPERTY MUST BE BOTH (1) QUALIFYING PROPERTY, AND (2) LIKE-KIND PROPERTY.
Some properties have more than one classification at the time of sale. For example, a farmer sells his farm including his personal residence. The sale or exchange is allocated between the real estate held for personal use (the personal residence) and the real estate held for use in a trade or business (the farm). Another example is the sale or exchange of a duplex where the seller lived in one unit and rented out the other unit.
Under §1031, both business and investment property qualify. And it does not require only business property for business property or investment property for investment property. You can mix the classifications. For example, you can exchange a commercial warehouse (business property) for two unimproved lots (investment property). Or, a 100 acre tract of land (investment property) for an apartment building (business property). All could qualify.
Originally posted at http://housesinsocal.com/208-2/exchange-basics/
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