In facilitating 1031 like-kind exchanges we have found there to be 7 Keys to Success for investors who most successfully and profitably exchange properties.
The First Key to Success in 1031 Exchanges…Property Type
The first key to a successful 1031 exchange is recognizing the difference between investment property and property held for personal use. Property type is determined by your usage of the property. Section 1031 deals with deferring the taxes on an exchange of property “held for productive use in a trade or business or for investment” and is not applicable for property generally held for personal use.
Section 1031 allows for the exchange of non-owner occupied real property such as a rental home, duplex, apartment building, farm, raw land, or a tenant-in-common interest in an office building. I’ll talk more later about what properties are Like-Kind. Any property that is owner occupied as a primary residence will not qualify for tax deferral under Section 1031 unless there is mixed use in the same dwelling unit. E-mail me if you have questions about mixed use as it can be very complicated. Section 121 deals with primary residences, which have better tax breaks than those for investment properties. Second homes, vacation condos, and recreational lots are part of a special group and are usually considered personal use property and are not eligible for tax-deferred exchange unless personal use of the property amounts to 1) less than 10% of the time the property is rented or 2) no more than 14 days in a year.
So, think money making property and not your primary residence as the type of property that you can do in a 1031 exchange. Discuss amongst yourselves and let me know how I can help flesh out how property types are key in 1031 exchanges.