A 1031 exchange is a real estate investment tool that allows investors to swap one property for another and defer capital gains tax from a sale of real estate. A 1031 exchange is a great tool to defer paying taxes, but it cannot be used for every real estate transaction. Only property that is used for an investment or business purpose can qualify for a 1031 exchange. The following are examples of property that do not qualify as 1031 exchanges:
Primary residence – Your primary residence generally will not qualify for a 1031 exchange because it is not being used for an investment or business purpose. However, if a portion of your primary residence is being used for investment or business purposes, then a portion of your primary residence may qualify for a 1031 exchange.
Vacation home – Vacation homes generally cannot qualify for a 1031 exchange, but there is an exception. If the vacation home is rented for at least 14 days in a year and the property is not used as your residence for longer than the time it is rented, then the property can qualify for a 1031 exchange.
Property dealer – Property that is held with the primary intent to sell it cannot qualify as a 1031 exchange. For instance, if you operate a business that purchases property with the intent to fix it up and sell it, then the business may be classified as a property dealer and be unable to qualify for a 1031 exchange.
Personal property – Goods, chattels, and other movable assets that are not attached to land or real estate, such as furniture, automobiles, money, and artwork, cannot qualify for a 1031 exchange.
Tax code exclusions – Stocks, bonds, notes, securities, and interests in partnerships cannot qualify for a 1031 exchange.