Real Estate

The like kind standard for real property is extremely broad. In essence, any real property located in the United States, or in a US occupied area, which is held for business or investment purposes will qualify for exchange treatment. Some examples of real property which qualify for exchange treatment are: unimproved real property, improved real property, commercial buildings, ranch or farm land, tenancy in common interest. Other properties which may qualify are leasehold interest and vacation homes, with restriction, and easements, water or timber rights, dependant upon local law.

Vacation Homes

Vacation homes may qualify as investment property if personal use is minimal, or the home is rented. In Starker and Serdar, if losses based on a vacation home are deductible under other sections of code, then they might be considered "held for investment" under Section 1031. Section 280A governs the allowance of deductions from a dwelling unit. Section 280A(d) provides that if the taxpayer may not use the unit for personal purposes for a number of days which exceeds 14 days or 10% of the number of days during the year for which the dwelling is rented for fair market value. It is recommended that you speak with your own personal financial advisor to determine the qualification of a vacation or second home.

Tenants in Common

A TIC interest represents a co-ownership between 2 or more investors. In essence, rather than receiving a 100% interest, the investor receives a separate deed to an undivided interest, thus owning a fractional interest in a large property. A properly structured TIC is not a joint venture or partnership. Instead, each co-owner has the same rights as would a single owner. Generally, a management or operating agreement links the co-owners together.

The TIC offering can resolve special problems that arise while participating in a 1031 Exchange including:

• The Exchanger is unable to find and identify replacement property within the 45 day identification period.
• A desired property contract falls through before the 45th day of the identification period.
• The client cannot find a desirable property for the equity, value, and debt that must be replaced.

One of the primary advantages of the TIC option is the large number of properties available. In addition, the size of the TIC interest and closing date are very flexible.

However, great care should be taken so that the TIC arrangement is not considered a joint venture or partnership. An investor considering any TIC program should have their tax/legal advisors thoroughly review the proposed ownership arrangement to assess whether or not the structure will meet the requirements of IRC Section 1031.

As with any investment, the Exchanger should investigate fees, returns on investment and resale opportunities.