Overview of Eligible 1031 Exchange Property Types

Agricultural

1031 exchanges allow ranchers and farmers to diversify, consolidate, relocate, appreciate, and replace agricultural properties with less labor-intensive cash-flow properties. Less labor-intensive properties offer passive income to supplement retirement and maintain investment property for beneficiaries.

Commercial

Commercial properties typically include land and manmade structures to be depreciated, though the value may appreciate enough to net gains during the sale. Recaptured depreciation and gains produce qualifying tax deferral under a 1031 exchange. Commercial properties potentially eligible for 1031 exchange include:

• Apartments
• Convenience stores and gas stations
• Golf courses and practice ranges
• Hotels and motels
• Marinas
• Nursing homes
• Office Buildings
• Parking garages and lots
• Self-storage units
• Shopping centers and strip malls
• Warehouses

Conservation Easement

Conservation easements and land trusts are increasingly popular and can preserve millions of acres for wildlife conservation, forestry, and wetlands. Land and conservation easements can be created by transferring all or partial rights to qualified non-governmental conservation organizations for a specific time. Conservation easement ownership establishes the legal right to prohibit the development of the land, which can be donated or sold to charitable organizations eligible for charitable income tax deductions.

Delaware Statutory Trusts (DSTs)

A DST allows deferring capital gains taxes when replacing partial interests in a cash flow property, provided owners or investors are not considered partners for income tax purposes. Revised tax code allows DSTs to acquire real estate in which beneficial interest is treated as direct interest, meeting qualifications for 1031 exchanges. DSTs have no voting authority nor require forming an LLC, permitting an unlimited number of investors. DSTs are a passive option for investing additional net sales proceeds after identifying replacement property or additional passive investment.

International

The same 1031 exchange rules apply to international property as real and private property, though United States properties are not considered like-kind with properties outside the country. Non-citizens with an Individual Taxpayer Identification Number (ITIN) can benefit from a 1031 exchange by holding the exchange funds or net equity locally rather than repeatedly converting domestic and sovereign currency. Escrow accounts or disbursement authorization procedures satisfy 1031 exchange constructive receipt requirements by establishing a “bank advocate” to meet the “related party” requirements.

Oil, Gas, Mineral, Water, and Ditch Rights

Oil, gas, and mineral interests, along with water and ditch rights, qualify for a 1031 exchange due to the perpetual interests gained through leases and royalties: 

• Leases: Leases qualify as real property interests and grant the lessee the right to remove minerals for a specific time period or to depletion, along with discovery and removal costs. Typically, leases are classified as working or operating interests, allowing the lessee to deduct intangible drilling costs, including labor, transportation, fuel, maintenance and repair, supplies, and other production expenses. 
• Royalties: Oil, gas, or mineral royalties are not considered operating interest, nor responsible for, or incurring, production costs. Royalty holders receive a percentage of interest for all materials removed from the property indefinitely. 

Residential

Residential property, ranging from single-family homes to apartment complexes, is the most common type of property used in 1031 exchanges. A 1031 residential property exchange is a quick means of building an investment portfolio with increased cash flow, renewed depreciation schedules, and greater purchasing power. 

Tenant in Common (TIC) Interests

A TIC is one method of taking partial ownership of a property an investor could not otherwise afford individually, such as a strip mall. Most TIC investments require accredited investor status, a designation for net worth exceeding $1 million, and an annual income exceeding $200,000 in the previous two years, or $300,000 if investing with a spouse. TICs are limited to 35 investors.

Timberland

Perpetual timber rights for harvesting unlimited-standing timber are classified as real property under state law. Deeds for timber must be conveyed, not sold, and cannot contain pre-established cutting contracts, or the timber must be considered personal property, not like-kind. Under a 1031 exchange, a timber deed can be transferred to real property to maintain ownership.

Vacation Rental

Qualifying vacation rental properties include coastal homes, rentals and condominiums, lake cottages, and inland condominiums. Each provides opportunities to hold as investments for appreciation and deduct expenses and depreciation. For 1031 exchange purposes, personal use of vacation property is limited to 14 overnights or 10 percent of the number of days rented each year. 

1031 Federal Exchange Helps Real Estate Investors Identify Potential Exchange Properties and Investments

Whether a first-time or seasoned investor, 1031 Federal Exchange can help you identify like-kind investment property and provide sound guidance. Call today at 513-450-3039 or contact us online to schedule a free consultation. Located in Loveland, Ohio, we serve clients nationwide.