When considering a 1031 exchange, it's crucial to understand the types of properties that qualify for this tax-deferral strategy. Under Section 1031 of the Internal Revenue Code, the properties involved in the exchange must be "like-kind," which refers to the nature or character of the property, not its grade or quality. This means that both the relinquished property (the property you are selling) and the replacement property (the property you are acquiring) must be held for productive use in a trade or business or for investment purposes.

Qualifying Properties:

1. Real Property Held for Investment or Business Use: The properties must be held for investment or used in a trade or business. This includes rental properties, commercial buildings, and land held for investment. For example, you can exchange an apartment building for a retail center, or raw land for an office building, as long as both are held for investment or business use.
2. Improved and Unimproved Real Estate: The IRS does not differentiate between improved and unimproved real estate. You can exchange a vacant lot for a developed property, such as a warehouse or a shopping center, as long as both are held for investment or business purposes.
3. Mixed-Use Properties: Properties that have both residential and commercial uses can qualify, provided the portion of the property involved in the exchange is held for investment or business use. For instance, if you own a building with a storefront on the ground floor and apartments above, you can exchange it for another mixed-use property.
4. Leaseholds with 30+ Years Remaining: Leasehold interests with 30 years or more remaining can be exchanged for fee simple interests or other qualifying leaseholds.

Non-Qualifying Properties:

1. Primary Residences: Properties held for personal use, such as your primary residence, do not qualify for a 1031 exchange. However, if you have a property that was once a rental and later converted to a primary residence, you may be able to use a combination of Section 121 and Section 1031 to exclude and defer gains.
2. Property Held Primarily for Sale: Properties held primarily for sale, such as inventory or "flips," do not qualify. These are considered dealer properties and are not eligible for 1031 exchanges.
3. Personal Property: As of the Tax Cuts and Jobs Act of 2017, personal property no longer qualifies for 1031 exchanges. This includes items like machinery, equipment, and vehicles.

Example of a 1031 Exchange:

Let's say you own a rental property, a small apartment building, valued at $500,000, which you originally purchased for $300,000. You decide to sell this property and use the proceeds to acquire a larger commercial property, such as a retail center, valued at $700,000.

To facilitate this exchange, you engage Deferred.com as your Qualified Intermediary. We handle the sale of your apartment building and hold the proceeds. Within 45 days of selling your apartment building, you identify the retail center as your replacement property. You then have up to 180 days to close on the purchase of the retail center.

In this scenario, the apartment building and the retail center are both considered like-kind properties because they are held for investment purposes. By using Deferred.com as your Qualified Intermediary, you ensure that the transaction meets the IRS requirements for a 1031 exchange, allowing you to defer the capital gains tax on the sale of your apartment building. This deferral can provide significant tax savings and allow you to reinvest more capital into your new investment property.